TIDMRECI
RNS Number : 4923D
Real Estate Credit Investments Ltd
22 June 2023
This announcement contains inside information.
Real Estate Credit Investments Limited (the "Company")
Annual Report for RECI LN (Ordinary Shares)
The Board of Directors of the Company announces the release of
the Company's Annual Report and Audited Financial Statements (the
"Financial Statements") for the year ended 31 March 2023.
View the Financial Statements:
https://realestatecreditinvestments.com/investors/results-reports-and-presentations
For further information please contact:
Richard Crawley / Edward Mansfield +44 (0)20 3100
Broker: (Liberum Capital) 2222
+44 (0)20 7968
Investment Manager: Richard Lang (Cheyne) 7328
Real Estate Credit Investments Limited
Annual
Report and Accounts
2023
Attractive returns from credit exposure to UK
and Western European real estate credit markets
Real Estate Credit Investments is a specialist investor in the
United Kingdom and Western European real estate credit markets with
a focus on fundamental credit and value.
overview
AS AT 31 MARCH 2023
Overview and Highlights
-- Defensive credit exposure to UK and Western European real estate credit markets
- Stable and uninterrupted dividends delivered consistently since October 2013
-- Granular portfolio with detailed disclosure
- 53 positions
- Diverse portfolio across sectors and geography
-- Attractive and stable income in a changing interest rate environment
- Consistent portfolio yield of 7%+ offering a buffer to risk-free rates
- A high-yielding portfolio, combined with a short weighted
average life, ensures minimal exposure to yield widening and the
ability to redeploy at higher rates quickly
-- Access to Cheyne's established real estate investment team
and substantial origination pipeline
Key figures
Total Assets
GBP419.0m
(31 March 2022: GBP447.0m)
NAV per share
GBP1.47
(31 March 2022: GBP1.50)
Net Assets
GBP337.0m
(31 March 2022: GBP343.9m)
Net Profit
GBP20.6m
(Full year ended 31 March 2022: GBP24.6m profit)
RECI Offers:
-- Focus on senior secured credit, with defensive LTVs
-- Strong governance control over its loan book
-- Large, experienced, well capitalised borrowers
-- Conservative and flexible leverage profile
-- Dividend stability without compromising risk
-- Management from Cheyne's
Total NAV Return
6.2%
(31 March 2022: 6.9%)
Share Price
GBP1.34
(31 March 2022: GBP1.51)
Dividend Yield
9.0%
(31 March 2022: 8.0%)
FY 2023 Dividends
12.0 pence
(31 March 2022: 12.0 pence)
OVERVIEW
At a Glance
Providing compelling risk-adjusted returns
Real Estate Credit Investments ("RECI") is a closed-ended
investment company which originates and invests in real estate debt
secured by commercial or residential properties in the United
Kingdom and Western Europe.
The Company's aim is to deliver a stable quarterly dividend with
minimal portfolio volatility, across normal economic and credit
cycles, through a levered exposure to real estate credit
investments.
Investment areas
Bilateral Loans and Bonds
Predominantly bilateral senior real estate loans and bonds.
Market Bonds
Listed real estate debt securities such as Commercial Mortgage
Backed Securities (CMBS) bonds.
Investment Portfolio Composition
RECI's investment portfolio is a diversified book of 53
positions in real estate bonds and loans.
NAV and Share Price As at 31 March
2023
------------------------ --------------
Net Assets GBP337.0m
------------------------ --------------
Shares Outstanding 229.3m
------------------------ --------------
NAV (per share) GBP1.47
------------------------ --------------
Share Price (per share) GBP1.34
------------------------ --------------
(Discount)/Premium (8.8)%
------------------------ --------------
Dividend Yield 9.0%
------------------------ --------------
Market Capitalisation GBP307.3m
------------------------ --------------
Total NAV Return*
------------------------------ -----
Half Year Ended 31 March 23 3.1%
------------------------------ -----
Financial Year Ended 31 March
23 6.2%
------------------------------ -----
Prior Financial Year Ended
31 March 22 6.9%
------------------------------ -----
Last Three Financial Years
Ended 31 March 23 26.9%
------------------------------ -----
Last Five Financial Years
Ended 31 March 23 32.1%
------------------------------ -----
* The Total NAV Return measures the combined effect of any
dividends paid, together with the rise or fall in the NAV per
Share. The Total NAV Return relates to past performance and takes
into account both capital returns and dividends paid to
Shareholders. Any dividends received by a Shareholder are assumed
to have been reinvested in the assets of the Company at its NAV per
Share on the ex-dividend date. The Total NAV Return is considered
an Alternative Performance Measure pursuant to ESMA Guidelines
which is unaudited and outside of the scope of International
Financial Reporting Standards ("IFRS").
Portfolio by Geography
by % of Total Committed Capital
including PIK
%
Allocation Since
Mar-23 Mar-22
----------- -------------- --------
UK 58.3% 13.7%
----------- -------------- --------
France 23.8% (11.1%)
----------- -------------- --------
Spain 7.5% (3.1%)
----------- -------------- --------
Finland 3.7% (0.0%)
----------- -------------- --------
Portugal 2.8% 2.8%
----------- -------------- --------
Ireland 1.6% 0.0%
----------- -------------- --------
Italy 1.2% (1.4%)
----------- -------------- --------
Germany 1.1% (0.9%)
----------- -------------- --------
Portfolio by Sector
by % of Total Committed Capital including PIK
% %
Allocation Allocation
Mar-23 Mar-22
---------------------- ----------- -----------
Hotel 19.8% 22.6%
---------------------- ----------- -----------
Mixed-Use 17.1% 21.2%
---------------------- ----------- -----------
Student Accommodation 11.9% 10.2%
---------------------- ----------- -----------
Residential 11.8% 6.7%
---------------------- ----------- -----------
Office 11.6% 11.7%
---------------------- ----------- -----------
Co-Living 7.0% 3.2%
---------------------- ----------- -----------
Leisure 5.0% 2.4%
---------------------- ----------- -----------
Later Living 3.3% 0.0%
---------------------- ----------- -----------
Housebuilder 3.3% 4.8%
---------------------- ----------- -----------
Assisted Living 3.2% 3.2%
---------------------- ----------- -----------
Retail 1.3% 3.1%
---------------------- ----------- -----------
Logistics 2.0% 2.2%
---------------------- ----------- -----------
Land 1.9% 0.0%
---------------------- ----------- -----------
Industrial 0.8% 0.8%
---------------------- ----------- -----------
Healthcare 0.0% 7.9%
---------------------- ----------- -----------
OVERVIEW
About the Company
The Investment Objective of the Company is to provide
Shareholders with attractive and stable returns, primarily in the
form of quarterly dividends, by exposure to a diversified portfolio
of real estate credit investments, predominantly comprising real
estate loans and bonds.
Real Estate Credit Investments Limited ("RECI" or the "Company")
is incorporated in Guernsey, governed by the Companies (Guernsey)
Law, 2008 (the "Companies Law") and regulated as an authorised
closed-ended investment scheme by the Guernsey Financial Services
Commission. At the Annual General Meeting ("AGM") in September
2021, the continuation vote was passed and the next continuation
resolution will be subject to Shareholder approval at the AGM to be
held in September 2025.
The Company invests in real estate debt secured by commercial or
residential properties in the United Kingdom and Western European
countries focusing primarily on those countries where it sees the
changing dynamics in the real estate debt market offering a
sustainable deal flow for the foreseeable future. The Company has
adopted a long-term strategic approach to investing and focuses on
identifying value in real estate debt. In making these investments,
the Company uses the expertise and knowledge of its Alternative
Investment Fund Manager ("AIFM"), Cheyne Capital Management (UK)
LLP ("Cheyne" or the "Investment Manager").
The shares are currently listed on the premium segment of the
Official List of the UK Listing Authority and trade on the Main
Market of the London Stock Exchange. The shares offer investors a
levered exposure to a portfolio of real estate credit investments
and pay a quarterly dividend.
Website and Share Price Information
The Company has a dedicated website, which can be found at
www.realestatecreditinvestments.com, that contains information,
including regulatory announcements, share price information,
financial reports, investment objectives and strategy, investor
contacts, information on the Board and information on the
Alternative Investment Fund Managers Directive ("AIFMD").
Investment Objective and Investment Policy
Investment Objective
The Investment Objective of the Company is to provide
Shareholders with attractive and stable returns, primarily in the
form of quarterly dividends, by exposure to a diversified portfolio
of real estate credit investments, predominantly comprising real
estate loans and bonds.
Investment Policy
To achieve the Investment Objective, the Company invests and
will continue to invest in real estate debt secured by commercial
or residential properties in the United Kingdom and Western
European countries.
The real estate credit investments may take different forms but
are likely to be:
(i) secured real estate loans, debentures or any other forms of
debt instruments (together "Secured Debt"). Secured real estate
loans are typically secured by mortgages over the property or
charges over the shares of the property-owning vehicle. Individual
Secured Debt investments will have a weighted average life profile
ranging from six months to five years. Investments in Secured Debt
will also be directly or indirectly secured by one or more
commercial or residential properties, and shall not exceed a
loan-to-value ("LTV") of 85% at the time of investment;
(ii) listed debt securities and securitised tranches of real
estate related debt securities, for example, residential mortgage
backed securities and commercial mortgage backed securities
(together "MBS"). For the avoidance of doubt, this does not include
equity residual positions in MBS; and
(iii) other direct or indirect opportunities, including equity
participations in real estate, save that no more than 20% of the
total assets will be invested in positions with an LTV in excess of
85% or in equity positions that are uncollateralised. On certain
transactions, the Company may be granted equity positions as part
of its loan terms. These positions will come as part of the
Company's overall return on its investments and may or may not
provide extra profit to the Company depending on market conditions
and the performance of the loan. These positions are deemed
collateralised equity positions. All other equity positions that
the Company may invest in are deemed uncollateralised equity
positions.
Dividend Policy
Subject to the applicable requirements and restrictions
contained in the Companies Law, the Company may consider making
interim dividend payments to Shareholders, having regard to the net
income remaining after the potential reinvestment of cash or other
uses of income, at a level the Directors deem appropriate, in their
sole discretion, from time to time. There is no fixed date on which
it is expected that dividends will be paid to Shareholders.
As it has since 2013, the Company intends to continue to pay a
stable quarterly dividend with the potential for additional
payments if investment returns permit
OVERVIEW
Chairman's Statement
RECI continued to deliver a stable NAV and attractive annual
dividend of 12 pence per share, amid challenging times and volatile
markets
Bob Cowdell
Chairman
No review of our financial year ended 31 March 2023 can ignore
the extraordinary events and global economic and market volatility
which provided the backdrop to your Company's performance, as it
continued to deliver a stable NAV and an attractive, sustainable
dividend for our Shareholders.
The war in Ukraine continued throughout the year under review
and there is no imminent sign of a cessation or peaceful
resolution. There have also been rising tensions in Asia caused by
the actions of China and North Korea. Events saw oil and commodity
prices surge higher, with supply chains still struggling to recover
from the Covid crisis. The consequence was the rise of inflation
throughout the world and the inevitable response of Central Banks
in the UK and abroad in raising interest rates at the fastest pace
seen in decades, which created currency and market volatility.
Nervousness was heightened by the threat of potential recession and
many suffered as the "cost of living crisis" impacted businesses
and individuals.
In addition, the UK suffered political and market turmoil in
Autumn 2022, following the removal of Boris Johnson as Prime
Minister, the ill-fated tenure of Liz Truss and her government's
September 2022 "Mini-Budget", which destabilised credit markets.
These events caused significant credit and currency market reaction
and Rishi Sunak, the UK's third Prime Minister during the last
financial year, and his Chancellor have been seeking to steady and
reassure markets to negate the political risk premium in credit and
UK gilt markets.
Market confidence was further tested in Q1 of 2023 with concerns
arising about the stability of the US and international banking
sector, following the run on deposits of Silicon Valley Bank in the
US and its UK branch and the issues at Credit Suisse ahead of its
acquisition by UBS. The aggressive hiking of interest rates in the
US has led to further stress being experienced by US regional banks
and driven market concerns about potential issues impacting the
wider banking community.
Inevitably, this has negatively impacted investor sentiment amid
concerns about the credit and real estate markets. There has been
significant sector widening of discounts for companies investing in
real estate debt and for REITs, reflecting investor nervousness of
the negative commentary on the outlook for commercial real estate
valuations.
It is probably no surprise that markets in such a year have been
described to me by several senior market professionals as "the
worst of my career"!
Nevertheless, your Board and Cheyne remained committed to
continuing to deliver attractive returns for our Shareholders. The
Company's portfolio composition positioned it well to withstand the
various challenges and steer a course through these difficult
markets, as evidenced by the stable net asset value maintained
throughout the financial year.
I am pleased to report that for the year ended 31 March 2023,
RECI delivered a total net profit of GBP20.6 million and maintained
an unchanged dividend of 3 pence per quarter, while taking the
opportunity to continue to enhance the quality of RECI's
portfolio.
Reacting to the changing market background, Cheyne moved to
strengthen the Company's position by: transacting the majority of
new loans on a floating rate basis; increasing the focus on senior
loans to over 90% of the total portfolio; reducing the holding in
public market bonds; and investing in a pipeline of new, higher
return opportunities which will enhance the dividend income
cover.
Financial Performance
RECI reported a total net profit for the financial year ended 31
March 2023 of GBP20.6 million on year end total assets of GBP419.0
million, compared with a GBP24.6 million net profit in the year
ended 31 March 2022, on year end total assets of GBP447.0
million.
The NAV as at 31 March 2023 was GBP1.47 per share (GBP1.50 per
share as at 31 March 2022) which, combined with the 12 pence per
share of dividends payable in respect of the year ended 31 March
2023, represents an annualised total return for Shareholders of
6.2%.
During the financial year ended 31 March 2023, the Company's
shares traded at an average discount to NAV of 6.1%, (0.7% premium
for the year ended 31 March 2022).
Total quarterly dividends declared in respect of the financial
year ended 31 March 2023 were an unchanged 12 pence per share,
returning GBP27.5 million to our Shareholders.
In the course of the last financial year, the Company utilised
short-term leverage at an average cost of borrowing of 3.2%, with
average gross leverage of GBP121.2 million or 1.36x NAV. RECI also
introduced asset level structured leverage (totalling GBP20.6
million at year end), at an average borrowing cost of 5.9%.
During the financial year to 31 March 2023, the Company
committed GBP155.2 million to eight new deals and funded GBP158.6
million into new and existing deals, compared with GBP81.6 million
and GBP113.1 million respectively in the previous financial year.
RECI also received cash repayments and interest of GBP159.0 million
in this year, compared with GBP132.2 million in the year ended 31
March 2022.
Financial Year Review
Despite the challenges to real estate and credit markets, in
particular the yield widening in the bond markets following the 23
September 2022 "Mini-Budget", the Company's robust portfolio
ensured the NAV remained stable at an average of GBP1.50 per share
during the financial year, notwithstanding the payment to
Shareholders of four unchanged dividends, totalling 12 pence per
share, during the period.
That NAV resilience reflects the positioning of RECI's
portfolio. In response to climbing inflation and rising interest
rates, Cheyne moved to execute new loans on floating rather than
fixed rate terms for the majority of its new deals. In line with
our stated strategy of increasing exposure to lower risk senior
positions, 90.3% of the Company's positions were in senior assets
by the financial year end. The size and capital strength of RECI's
chosen counterparties continued to increase and the weighted
average life of the whole portfolio was 2.3 years for the financial
year ended 31 March 2023. All scheduled interest and repayments
were received as anticipated during the financial year; endorsing
the credit quality of the portfolio, which is driven by Cheyne's
investment process and deal selection.
The market turbulence also presented opportunities to deploy
capital to strengthen the Company's investment returns, with Cheyne
identifying a pipeline of potential transactions offering enhanced
returns of over 10%. These underpin RECI's attractive current
dividend pay-out of 12 pence per share per annum, improve dividend
cover and provide the opportunity for NAV stability and potential
growth. As at 31 March 2023 the weighted average LTV of the
Company's portfolio was 59.2% (62.4% at 31 March 2022), providing
significant defensive equity headroom. The new investments were
funded by deploying leverage and cash from realisations and
repayments. The Board maintains its practice of considering all
options when assessing the levels of cash utilisation and
allocation.
When the financial year began on 1 April 2022, RECI had gross
balance sheet leverage of GBP100.4 million (1.29x NAV) and leverage
net of cash of GBP47.8 million (1.14x NAV). The Board and Cheyne
have continued to monitor RECI's cash resources and repayments and
to consider the appropriate level and blend of gearing for the
Company. During the last financial year, the Company introduced
asset level leverage (which may be structured on a non-recourse or
partial recourse basis), alongside flexible balance sheet leverage.
At the year end, the Company had gross balance sheet leverage of
GBP80.2 million (1.24x NAV) and leverage net of cash of GBP63.7
million (1.20x NAV), together with GBP20.6 million of asset level
leverage.
RECI has now entered into its first partial recourse asset level
leverage transactions, in line with its strategy of leverage
diversification. As at 31 May 2023, the Company's gross balance
sheet leverage was GBP59.3 million (1.17x NAV); its balance sheet
leverage net of GBP28.7million cash was 1.09x NAV; and its net
effective leverage, including contingent liabilities of GBP3.6
million (being the partial recourse commitment, representing 25% of
asset level borrowings provided to certain asset level structured
finance counterparties), was 1.10x NAV.
The negative market sentiment caused by the geopolitical and
economic events during our last financial year inevitably impacted
RECI's share price and saw material discount widening across the
investment funds sector generally and the credit and real estate
sectors, in particular. During the half year to 30 September 2022,
the Company's shares traded at an average discount to NAV of 2.4%.
The market volatility following the September 2022 "Mini-Budget"
provoked much greater investor uncertainty in credit markets,
contributing to some reactive selling of RECI shares, causing the
discount to widen further. Overall, the Company's shares traded at
an average discount to NAV of 6.1% for the financial year ended 31
March 2023 and the discount has since widened to trade at an
average of 13.7% since 1 April 2023 reflecting ongoing market
nervousness.
The Company's shares closed at GBP1.29 on 19 June 2023 (a
discount of 13.8%), which would provide a yield of 9.3% on the
basis of continuing to pay a quarterly 3 pence dividend per share
for the rest of the current financial year. The merits of RECI's
offering and, in particular, the yield at current share price
levels, appears to have been overlooked amid the broader volatile
market background. Your Board believes that RECI provides investors
with a highly attractive, long-term income stream with enhanced
dividend cover. The Company is positioned to deliver this
attractive dividend stream alongside a stable NAV and provide
investors with a substantial and liquid company (with total assets
of GBP419.0 million and market capitalisation of GBP307.3 million
at 31 March 2023) with the potential to grow over time.
Ravi Stickney, CIO of Cheyne Real Estate, continued the
programme of quarterly updates for Shareholders and investors,
providing a detailed and comprehensive review of RECI's portfolio
and Cheyne's views on the broader credit and property sectors. We
are currently reviewing and seeking to enhance our programme of
online events and meetings for investors. During Autumn 2022, the
Board worked with our service providers to enhance the Company's
website and Fact Sheet.
The global geopolitical and economic challenges of the last 15
months have caused many headlines and much market volatility and
uncertainty, which has inevitably impacted investor sentiment.
Against this macro backdrop, the Directors and Cheyne remain
committed to providing detail and transparency regarding the
Company's portfolio and investment strategy, allowing all investors
to focus upon RECI and its merits and opportunities,
notwithstanding the broader market environment.
Board Update
The Board and its committees continue to operate effectively,
with an equal representation of male and female Directors.
Reflecting our ESG focus, the Board appointed Colleen McHugh to
the role of "ESG Lead" in October 2022.
Since the start of the last financial year, members of the Board
have purchased an aggregate of 90,000 shares in the Company,
increasing the Directors' aggregate holding to 425,250 shares.
Environmental, Social and Governance Matters ("ESG")
Your Board continues to recognise and support the growing focus
on ESG considerations and the importance of ethical factors,
including climate change, when pursuing the Company's investment
objective and in the selection of service providers and advisers to
the Company.
In her role as "ESG Lead", Colleen McHugh is working closely
with Cheyne in developing and implementing RECI's ESG approach.
Page 30 of the Stakeholder Engagement section and pages 32-36 of
the Sustainability Report provide further information about the
Company's and the Manager's approach to ESG matters.
Outlook
Several of the geopolitical and economic uncertainties which
provided the backdrop to our financial year ended 31 March 2023
appear likely to remain for the rest of the current financial year.
While it may be hoped that inflation and interest rates are
approaching their peak, despite the UK's core inflation rate
remaining stubbornly high, both appear likely to remain well above
the average of the last decade for some time yet. The threat of
potential recession remains and there are many who are feeling the
daily impact of the "cost of living crisis".
Nevertheless, the Company's robust portfolio composition and its
transition into senior loans and floating rate terms has positioned
it well to withstand these challenges and steer a course through
difficult market conditions.
In considering all options when deciding on the appropriate
allocation of the Company's cash resources, the Board is mindful of
when opportunities present themselves to achieve attractive
repeatable returns from investments and reinvestments and thereby
enhance the "investment case" for RECI. Encouragingly, Cheyne and
its deal pipeline have ensured that RECI already has and will
continue to benefit from the opportunities to lend at attractive
returns of over 10% to enhance portfolio returns. The current
market dislocation will benefit RECI in achieving enhanced terms
for its lending, as competitor banks and specialist lenders to the
sector withdraw.
In the face of macro volatility, your Board and Investment
Manager have always believed in the benefit of focusing on that
which we can exercise direct control over, namely: expert
origination capability; highly disciplined investment selection;
modest levels of flexible gearing; maintaining the payment of an
attractive and consistent dividend; and positioning the portfolio
to enhance NAV.
The Directors believe that RECI remains soundly positioned to
continue to deliver an attractive and stable dividend to investors
seeking a reliable long-term income stream from a listed and liquid
investment company, with a highly regarded specialist Investment
Manager.
Bob Cowdell
Chairman
21 June 2023
KPIs and Financial Highlights
Key Performance Indicators
31 Mar 31 Mar
2023 2022
------------------------------------ ------- -------
Balance Sheet
------------------------------------ ------- -------
Net Asset Value ("NAV") per share GBP1.47 GBP1.50
------------------------------------ ------- -------
Share price GBP1.34 GBP1.51
------------------------------------ ------- -------
(Discount)/premium (8.8)% 0.4%
------------------------------------ ------- -------
Average (discount)/premium in year* (6.1)% 0.7%
------------------------------------ ------- -------
Leverage (% of NAV)** 23.8% 29.4%
------------------------------------ ------- -------
* Average (discount)/premium in year is the average of the
difference between the share price and the NAV per share divided by
NAV per share.
** Leverage is the recourse financing divided by the net assets.
31 Mar 31 Mar
2023 2022
-------------------------------------------------- ------ ------
Profit, Loss and Dividends
-------------------------------------------------- ------ ------
Earnings per share 9.0p 10.7p
-------------------------------------------------- ------ ------
Dividends per share declared for the year 12.0p 12.0p
-------------------------------------------------- ------ ------
Total NAV Return (including dividends) annualised 6.2%* 6.9%
-------------------------------------------------- ------ ------
* Assumes re-investment of dividends.
Financial Highlights
31 Mar 31 Mar
2023 2022
----------------------------------------------- --------- ---------
Balance Sheet
----------------------------------------------- --------- ---------
Cash, cash equivalents and cash held by brokers GBP16.5m GBP52.6m
----------------------------------------------- --------- ---------
Net assets GBP337.0m GBP343.9m
----------------------------------------------- --------- ---------
31 Mar 31 Mar
2023 2022
---------------- -------- --------
Profit and Loss
---------------- -------- --------
Operating income GBP30.7m GBP32.4m
---------------- -------- --------
Net profit GBP20.6m GBP24.6m
---------------- -------- --------
The complete set of the Balance Sheet and Profit and Loss items
are presented in the Company's financial statements.
Further Information
Monthly fact sheets as well as quarterly update presentations
are available on the Company's website:
www.realestatecreditinvestments.com.
Annual Report and Accounts 2023
Business
and Strategy Review
In this section
Strategic Framework and Performance
Highlights
-----------------------------------
Strategic Report
-----------------------------------
Investment Manager's Report
-----------------------------------
Stakeholder Engagement
-----------------------------------
Sustainability Report
-----------------------------------
Business and Strategy Review
Strategic Framework and Performance Highlights
Senior real estate lending remains a high conviction theme
Objectives
1 Provide investors with a diversified portfolio of real estate credit investments
2 Deliver a stable quarterly dividend with minimal volatility
3 Exploit opportunities in the real estate market
4 Position the Company to grow through opportunities the Investment Manager is delivering
Performance Highlights
Newly Committed in year
GBP155.2m
(as at 31 March 2023)
Return to Shareholders
GBP27.5m
(as at 31 March 2023)
Investment Portfolio
GBP400.7m
(as at 31 March 2023)
Performance Highlights
Progress in Year Ended 31 March 2023
1
-- RECI's investment portfolio is a diversified book of 53
positions in real estate loans and bonds.
-- Over the course of the last financial year, RECI has
committed GBP155.2 million to eight new deals, and funded GBP158.6
million into new and existing deals during the year.
2
-- Paid out dividends of 3 pence per share each quarter, 12 pence over the year.
-- A total of GBP27.5 million returned to our Shareholders.
3
-- Investment book has grown to GBP400.7 million (gross of
leverage) as at 31 March 2023 which is spread across 53 positions
with a weighted average levered gross yield of 11.1% and an average
loan-to-value of 59.2%.
-- All repayments were received on time as anticipated.
-- RECI also received cash repayments and interest of GBP159.0 million in this year.
4
-- RECI has continued its migration towards an all-senior loan book.
-- Progress with measures to position the Company to achieve its
longer-term aim of growing the Company.
-- Protection and maintenance of dividends by improved returns on the loans and re-investment.
-- Continue to de-risk and optimise funding lines.
Business and Strategy Review
Strategic Report
The Strategic Report describes the business of the Company and
details the principal risks and uncertainties associated with its
activities.
Investment Objective and Investment Policy
The Investment Objective and Investment Policy are set out on
page 6, along with a further paragraph "About the Company"
explaining in more detail the corporate structure and listing of
the Company's shares.
RECI is externally managed by Cheyne, a UK investment manager
authorised and regulated by the Financial Conduct Authority
("FCA"). Cheyne is a limited liability partnership registered in
England and Wales on 8 August 2006 and is authorised and regulated
in the conduct of investment business in the United Kingdom by the
FCA. Cheyne is also the AIFM of the Company. Cheyne has offices in
London, Berlin, Madrid and Paris.
Current and Future Development
A review of the year and outlook is contained in the Investment
Manager's Report and also within the Chairman's Statement.
Performance
A review of performance is contained in the Key Performance
Indicators ("KPIs") and financial highlights section and the
Investment Manager's Report.
A number of performance measures are considered by the Board and
the Investment Manager in assessing the Company's success in
achieving its objectives and considering its progress and
performance. The KPIs are shown on page 11.
Duties and Responsibilities
The Board has overall responsibility for maximising the
Company's success by directing and supervising the affairs of the
business and meeting the appropriate interests of Shareholders and
relevant stakeholders, while enhancing the value of the Company and
also ensuring the protection of investors. A summary of the Board's
responsibilities is as follows:
-- statutory obligations and public disclosure;
-- strategic matters and financial reporting;
-- risk assessment and management including reporting,
compliance, governance, monitoring and control; and
-- other matters having a material effect on the Company.
The Board is responsible to the Shareholders for the overall
management and strategy of the Company but has delegated day-to-day
operations to the Investment Manager and Citco Fund Services
(Guernsey) Limited ("Citco" or the "Administrator"), while
reserving the powers of decision making relating to the
determination of the Investment Policy, corporate structure and the
management of the share capital of the Company.
The Board is further responsible for financial reporting and
risk management and determining the dividend and accounting
policies. While the Investment Manager manages the portfolio of the
Company, the Board retains responsibility for overseeing the
Investment Manager and ensuring the establishment and ongoing
operation of a sound system of internal control. Any material
contracts and those not in the normal course of business are also
subject to approval by the Board.
The Board is also responsible for its own structure, size and
effectiveness, with the delegation of some duties to Committees
made up of its members. The Board retains control of the Committees
and requires that they report to the full Board on a regular basis,
providing their findings and recommendations. The Nomination
Committee is responsible for considering the size, structure and
composition of the Board; retirements and appointments of
additional and replacement Directors and, as appropriate, makes
recommendations to the Board. The Remuneration Committee determines
Directors' remuneration and sets the Company's remuneration
policy.
The Board performs a formal and rigorous review of its own
performance and continually scrutinises its independence and
transparency.
The Board's responsibilities for the Annual Report are set out
in the Directors' responsibility statement. The Board is also
responsible for issuing appropriate half-yearly financial reports
and other price-sensitive public reports.
Long-term Viability
The Directors have assessed the prospects of the Company over a
longer period than the 12 months required by the 'Going Concern'
provision. The Board has chosen a period of three years for the
following reasons:
(i) The Company's planning horizon covers a three-year period;
(ii) The next continuation vote is due in September 2025; and
(iii) The weighted average life of the bond portfolio is 2.5
years as at 31 March 2023, the usual term of a new loan at
origination is between 3 to 5 years, so the majority of the assets
could be expected to be realised in a three-year period, or shortly
thereafter.
The Board conducts an annual review, stress testing the
Company's cash flows arising from the loan and bond portfolio over
a three-year period, including interest received and proceeds from
realisations, short-term finance obligations of the Company and
dividend cover. Further considerations are the inherent
sensitivities within the loan and bond portfolios and their impact
on the cash flows.
The Board has identified a number of principal risks, which are
detailed below. The Board has taken these into account when
considering the long-term viability of the Company.
The Board routinely conducts three-year reviews, stress testing
the performance against a number of adverse scenarios, such as the
fair value write down of the investments, or reduced cash flows
from the investment portfolio. The fair value stress test was
considered relevant to factor in any potential events affecting the
underlying assets or credit concerns about the borrowers which
potentially could impact on the fair value. The reduced cash flow
stress test was considered relevant in the event of potential
defaults arising on the loan portfolio and the inability to recover
the interest or principal back in full.
In the current environment, the Company has also considered the
future of its Investment Manager when looking at its own viability,
and given the size of the Investment Manager's platform away from
the Company and the private capital it manages in numerous other
real estate debt funds, of which the combined total is
approximately GBP5 billion AUM, the Investment Manager is expected
to be able to continue to manage the Company for the foreseeable
future.
Further consideration has been given with respect to the current
market environment, including the ongoing economic impacts of
relevant geopolitical and macro economic risks: including increased
interest rates, heightened inflation, supply chain dispruption, the
continuing impact of the Ukraine conflict; and the effects of
climate change and cyber security. The Investment Manager has
prepared sensitivity analyses including various stress scenarios.
An evaluation continues to be performed for each of the positions
in light of these potential impacts on operating models and
valuations and hence recovery prospects for certain individual
positions. The output of this analysis was used to i) report fair
value movements, and ii) update all the cash and income forecasting
for the portfolio. The Investment Manager continues to perform a
granular analysis of the future liquidity profile of the Company. A
detailed cash flow profile of each investment was completed,
incorporating the probability of likely delays to repayments, other
stress tests (and additional cash needs).
Even taking these stress scenarios into account and bearing in
mind the leverage and liquidity of the bond portfolio, the Company
is expected to be able to meet its liabilities over the three-year
period.
Risk Management
It is the role of the Board of Directors to review and manage
all risks associated with the Company, mitigating these either
directly or through the delegation of certain responsibilities to
the Audit and Risk Committee and Investment Manager. Additionally
the Board seeks to identify emerging risks and responds to them as
they evolve.
The Board considers that the following are the principal risks
and uncertainties faced and has identified the mitigating actions
in place to manage them.
Long-term Strategic Risk
The Company is subject to the risk that its long-term strategy
and its level of performance fail to meet the expectations of its
Shareholders. The shares may trade at a continuing discount to NAV
and Shareholders may be unable to realise their investments through
the secondary market at NAV per share. The Board monitors the level
of premium or discount of share price to NAV per share.
The Board monitors investment strategy and performance on an
ongoing basis and regularly reviews the Investment Objective and
Investment Policy in light of prevailing investor sentiment to
ensure the Company remains attractive to its Shareholders. The
Board is committed to promoting the Company with the long-term aim
of its share price trading at or around NAV and will consider all
options to achieve this. This may include consideration, as part of
the ongoing cash allocation policy, of implementing share buy-backs
to enhance NAV per share and potentially reduce any discount to
NAV. This will only be done when cash resources permit and in the
context of prevailing market conditions and the one-time potential
NAV uplift of a buy-back compared with the potential repeatable
long term benefit of investments in attractive high yielding
opportunities to enhance RECI's returns. There can be no certainty
that buy-backs will be implemented and/or that an enhancement to
share price would be achieved. No buybacks were made during the
year ended 31 March 2023.
The Company has the authority to make market purchases of fully
paid shares of up to 14.99% of the shares of no par value in issue,
and renewal of this authority will be sought from Shareholders at
the AGM in September 2023 and at each subsequent AGM, or earlier at
an Extraordinary General Meeting if the Directors consider it
appropriate.
Target Portfolio Returns and Dividend Risk
The Company's targeted returns are based on estimates and
assumptions that are inherently subject to significant business and
economic uncertainties and contingencies, and the actual rate of
return may be materially lower than the targeted returns. In
addition, the pace of investment may be slower than expected, or
principal may be repaid earlier than anticipated, causing the
return on affected investments to be less than expected. In
addition, if repayments are not promptly re-invested this may
result in cash drag which may lower portfolio returns. However, as
the Company is able to invest in both bonds and loans, the
Investment Manager has the ability to adjust the asset mix towards
bonds.
As a result the level of dividends and other distributions to be
paid by the Company may fluctuate and there is no guarantee that
any such distributions will be paid.
There may be economic circumstances and wider market
considerations that arise, that mean the Investment Manager and
Board deem it appropriate to maintain higher levels of cash
reserves.
The Investment Manager regularly provides the Board with reports
on pipeline opportunities, which include analysis of the expected
returns available. The Directors also regularly receive information
on the performance of the existing loans which includes analysis of
the likelihood of any early repayments which may impact
returns.
Valuation Risk
The valuation and performance of the Company's investments that
comprise its portfolio of real estate debt instruments are the key
value drivers for the Company's NAV and interest income. Judgements
over fair value estimates could significantly affect these key
performance indicators.
The Company categorises its financial assets and liabilities in
accordance with IFRS 9 and establishes fair value utilising the
methodology in accordance with IFRS 13, as set out in Note 15(d) to
the financial statements. Further information on valuation is
detailed in the Audit and Risk Committee Report on page 56 and Note
2 to the Financial Statements.
Credit Risk
Credit risk is the risk that a counterparty to a financial
instrument will fail to discharge an obligation or commitment that
it has entered into with the Company.
Market Bond Portfolio - The Company is subject to the risk that
issuers of asset backed securities in which it invests may default
on their obligations and that certain events may occur which have
an immediate and significant adverse effect on the value of such
instruments. There can be no assurance that an issuer of an
instrument in which the Company invests will not default or that an
event which has an immediate and significant adverse effect on the
value of such instruments will not occur, and that the Company will
not sustain a loss on the transaction as a result.
The Company seeks to mitigate this risk by monitoring its
portfolio of investments, reviewing the underlying credit quality
of its counterparties, on a monthly basis. In addition to the
underlying credit quality of borrowers the weighted average life of
the assets as at 31 March 2023 is 2.5 years, which is an additional
mitigant regarding any loss in value due to changes in borrowers
circumstances over the long term.
Bilateral Loan and Bond Portfolio - The Company is subject to
the risk that the underlying borrowers to the loans and bonds in
which it invests may default on their obligations and that certain
events may occur which have an immediate and significant adverse
effect on the value of such instruments. Any loan and bond may
become a defaulted obligation for a variety of reasons, including
non-payment of principal or interest, as well as covenant
violations by the borrower in respect of the underlying loan and
bond documents. In the event of any default on the Company's
investment in a loan and bond by the borrower, the Company will
bear a risk of loss of principal and accrued interest on the loan
and bond, which could have a material adverse effect on the
Company's investment. There can be no assurance that a borrower
will not default, that there will not be an issue with the
underlying real estate security or that an event which has an
immediate and significant adverse effect on the value of these
loans and bonds will not occur, and that the Company will not
sustain a loss on the transaction as a result. The Company seeks to
mitigate this risk by performing due diligence and monitoring its
portfolio of investments, reviewing the underlying credit quality
of its borrowers, performance of the underlying asset, and loan and
bond covenant compliance against financial information received and
the performance of the security, on a quarterly basis.
Market Risk
Market risk is the risk that the fair value and future cash
flows of a financial instrument will fluctuate because of changes
in market factors. Market risk comprises interest rate risk,
currency risk and price risk.
The Company's strategy on the management of market risk is
driven by the Company's Investment Objective as detailed on page 6
and in Note 1 to the financial statements.
The Company's market risk is managed on a daily basis by the
Investment Manager in accordance with policies and procedures
detailed in the latest Prospectus and summarised in the financial
statements.
Interest Rate Risk
Interest rate risk is the risk that the fair value and future
cash flows of a financial instrument will fluctuate because of
changes in market interest rates.
The Company invests in both direct real estate loans and
floating rate real estate debt securities, which include mortgage
backed securities ("MBS").
Real estate loans can have fixed interest coupons and are
therefore potentially exposed to the wider effects of changes in
interest rates. For bonds, the interest rate risk arises from the
effects of fluctuations in the prevailing levels of market interest
rates on the fair value of financial assets and liabilities and
future cash flows. A segment of the portfolio consists of floating
rate debt investments which are exposed to interest rate risk
through changes in interest rates, potentially having an effect on
prepayments and defaults of the underlying loans of the
securitisations.
In addition to the underlying credit quality of borrowers, the
weighted average life of the assets as at 31 March 2023 is 2.5
years, which is an additional mitigant regarding any losses in
value due to changes in borrowers' circumstances over the long
term.
While retaining the ability to do so, the Company does not
currently enter into hedging arrangements in respect of interest
rate fluctuations.
Currency Risk
Currency risk is the risk that the fair value or future cash
flows of a financial instrument will fluctuate because of changes
in foreign exchange rates. The Company is exposed to currency risk
to the extent that foreign exchange rates fluctuate in relation to
financial instruments that are denominated in currencies other than
British Pounds ("GBP").
The Company manages its foreign exchange risk on a portfolio
basis. The Company may bear a level of currency risk that could
otherwise be hedged where it considers that bearing such risks is
appropriate. The Company manages its foreign exposure via forward
foreign exchange contracts.
Liquidity Risk
Liquidity risk is the risk that the Company will encounter
difficulty in meeting obligations associated with financial
liabilities on a timely basis. The Company's liquidity risk is
managed on a daily basis by the Investment Manager in accordance
with policies and procedures detailed in Note 15(c) to the
financial statements. Where needed, the Investment Manager will
seek to liquidate positions to increase cash or reduce
leverage.
Much of the market for MBS and real estate loans is relatively
illiquid. In addition, investments that the Company purchases in
privately negotiated (also called "over-the-counter" or "OTC")
transactions may not be registered under relevant securities laws
or otherwise may not be freely tradable, resulting in restrictions
on their transfer, sale, pledge or other disposition except in a
transaction that is exempt from the registration requirements of,
or is otherwise in accordance with, those laws. As a result of this
illiquidity, the Company's ability to vary its portfolio in a
timely fashion and to receive a fair price in response to changes
in economic and other conditions may be limited.
Furthermore, where the Company acquires investments for which
there is no readily available market, the Company's ability to deal
in any such investment or obtain reliable information about the
value of such investment or risks to which such investment is
exposed may be limited.
For further information on risks, please refer to Note 15 to the
financial statements.
Other Risk Factors
The Board gives consideration to and, together with Cheyne,
monitors other relevant risks, in addition to the ones highlighted
above; this includes a consideration of any relevant Emerging Risks
as they evolve. These currently include: geopolitical and macro
economic risks: including increased interest rates, heightened
inflation, supply chain disruption, the continuing impact of the
Ukraine conflict; and the effects of climate change and cyber
security. Given the short weighted average life of the assets, and
the continual replacement of assets in the portfolio from the wider
Investment Manager's pipeline, such macro risks are worked through
in the life of the assets. Any issues that might potentially impact
the value of the investments, including impacts to supply chains,
are taken into account in the fair value. An evaluation of each of
the Company's positions in light of these risks is continually
monitored.
Business and Strategy Review
Investment Manager's Report
RECI is evolving to capitalise on the scalable opportunity
set
Ravi Stickney
Portfolio Manager
Managing Partner & CIO of Cheyne Real Estate
Market Review
Real Asset Valuations: A painful transition to the new normal
for some
The past year has brought about the recognition that the era of
low interest rates is gone for good.
A painful period of high inflation needed (and received)
sustained higher interest rates. That is set to continue to
mitigate the risk of an entrenched inflationary spiral in
economies. A successful policy response to curtail entrenched high
inflation will not, in our view, lead to rates returning to the
very low base that western economies have enjoyed for more than a
decade. Normalised rates that spur productivity and remove excess
from the markets are most likely to be the basis for the new
normal.
This presages a transitory period of higher rates, normalising
at a level that balances the need for productive growth and the
curtailment of excess.
For the real estate asset class, normalised long-term rates are
a key factor in the determination of valuations. The long period of
low rates brought about the assumption that all assets (even those
that prove to have little basis for demand) would rise as the
search for yield drove demand. Normalising rates will weed out the
weaker assets (those that have little basis for demand) but will
also spur demand for the best in class assets that are much needed
for future growth of our societies. These assets will help deliver
not just growth in our economies, but also promote the very best
outcomes for the environment and social cohesion.
There are immediate and longer-term implications for asset
values that consequently arise:
-- Assets that do not present the best environmental or social
credentials will give way to assets that do
-- Demand will be driven for assets that address the shifts in
the way we live and work. The demand for assets that do not address
these will decline sharply as they are no longer supported by low
interest rates
-- Values of all asset classes (regardless of demand strength)
will stabilise at lower levels, simply due to higher yield
expectations, before resuming their growth.
European Real Estate Debt Markets: A renewed cycle of
retrenchment
European real estate debt markets (unlike their counterparts in
North America) were already subdued coming into this last year from
a mix of increasingly onerous regulatory pressure and weak capital
ratios.
The declining valuations in real assets have compounded that
issue, as has the latest bout of bank capital uncertainty brought
about by the collapse of Silicon Valley Bank and Credit Suisse, and
the realisation that the perceived balance sheet strength of the
largest banks may need to be subject to a re-evaluation of their
strongest assets (long-term government debt). As Global and
European banks recognise the deficits arising from the (potentially
permanent) diminution in values of these long-dated securities, it
is very likely that the already low appetite for capital intensive
real estate lending will decline.
We are already seeing that retrenchment not just in the UK, but
across Europe.
Implications for the funding needs of Real Assets
The combination of the above declining values and retrenching
bank lending markets points to a prolonged concern about the viable
refinancing capability of all real assets, including those that
demonstrate the most stable income profile.
That financing "gap" is now becoming well understood with
several respected publications attempting to quantify the size of
that "gap". Whilst that gap is indeed significant, what is more
pertinent is that there is a scarcity of capable capital
(especially so in Europe) to provide any of that financing.
As banks retreat, the alternative lending market (of which RECI
and its manager, Cheyne Real Estate, have been leading participants
for more than 14 years now) will continue to move to take their
place. However, the degree of expertise and knowledge, and quantum
of capital, needed to effectively lend to the complex real estate
asset class will mean that the European based alternative lending
community will take time to bridge that gap.
The declining valuations and eroding bank markets do pose issues
for incumbent lenders who have potentially overstretched on the LTV
or focused on the higher risk mezzanine part of the capital
structure (particularly mezzanine on core income assets valued off
low yields).
Performance Review
Transition to conservative senior lending puts the credit book
in a sound position
RECI's evolution away from mezzanine and higher LTV lending and
core assets since Brexit in 2016 has put it in a very strong
position to mitigate this period of transition. Its gradual shift
to senior loans (90.3% of the portfolio at 31 March 2023) has been
deliberate in the aftermath of Brexit. This shift mirrors the shift
in the wider Cheyne Real Estate platform, which now manages in
excess of GBP4.1 billion in investor capital, with a majority of
that in the senior lending space.
RECI has evolved its lending to focus on the following:
-- Senior loans with a low-risk basis
-- Absolute governance and strong covenants
-- Lending to the larger and more capable sponsors with robust
business plans and deep financial resources committed
-- Lending to asset classes that provide for the highest degree
of sustainability (from an environmental and social standpoint) and
which also resonate with the changes in demand and supply.
With that evolution, the highly diverse lending book RECI has
today remains resilient.
Funding the Deals
Balance Sheet management
Structurally, RECI has married prudent management of its balance
sheet with the need for efficiency in its capital usage.
Short-term debt (in the form of rolling REPO lines), has
gradually been replaced with term matched funding lines and also
asset backed funding. Whilst more costly, these have provided
stability to the balance sheet through the various periods of
stress.
RECI's financial leverage position as at 31 March 2023 is 23.8%
of NAV against a maximum permitted financial leverage of 40%.
RECI's financial leverage (also referred to as recourse leverage)
comprises: (a) the flexible term repurchase agreements (REPO) on
its liquid bonds (the WA cost of this financing was 5.9% as at 31
March 2023); and (b) any partial recourse commitment that may be
provided to structured financing counterparties.
Funding Summary
We believe that the long-term strategy for the Company should be
a mix of structured term funding on its senior loan book and to a
lesser extent, where relevant, with REPO financing on its remaining
liquid bond book, thereby maintaining a conservative level of
recourse leverage supported by strong assets and liquid
instruments.
Dividend Cover and Promotion
Since 2013, RECI has maintained a dividend on its NAV of 7% or
better. The overarching ambitions of RECI are to provide investors
with stability, transparency and dividend consistency. On the
latter, the aim has been to have the dividends covered from net
income alone (i.e., income from the credit book and without having
to bear regard to mark to market gains or losses). That ambition
has been broadly achieved now with the move into higher yielding
senior loans and to a more efficient funding profile.
The RECI portfolio delivered a net profit of 6.0% on NAV as at
31 March 2023. During the year, the Company paid 12 pence per share
in dividends, which was GBP27.5m
(or 8.0% on NAV as at 31 March 2023). Notwithstanding the MTM
losses on the bond portfolio, due to recent global bond volatility,
the dividend covered from net interest income alone was 6.9%.
The credit strength of the portfolio is good, but the market
bond portfolio does create some price volatility for the YTD
return. Therefore, it is the Manager's intent to accelerate its
path towards rotation into a focus on senior lending and to exit
the market bond positions in a timely manner.
Annual Dividend for the Year
12.0 pence
Dividend Yield (on share price)
9.0%
Balance Cash including Asset Level
Sheet/Company Contingent cash collateral Net Effective Structured
Leverage(1) Liabilities(2) at broker leverage Funding
-------------------- -------------- --------------- ---------------- -------------- ------------
GBP Amount GBP80.2m GBP2.9m GBP16.5m GBP63.7m GBP20.6m
-------------------- -------------- --------------- ---------------- -------------- ------------
% of NAV 23.8% 0.9% 5.2% 19.4% 6.1%
-------------------- -------------- --------------- ---------------- -------------- ------------
WA cost of finance 5.9% - - 7.7%
-------------------- -------------- --------------- ---------------- -------------- ------------
Number of positions 16 6
-------------------- -------------- --------------- ---------------- -------------- ------------
1. RECI has a limit on balance sheet leverage (i.e. Financial
Leverage) of 40% of NAV, as set out in its borrowing policy.
2. Contingent liabilities include any partial recourse
commitment provided to asset level structured finance
counterparties.
Looking Forward
All of the above puts the Company on a sound asset and liability
footing and also positions it well for its continued delivery of an
attractive, long-term dividend stream for investors.
The priorities of the Company now are to address the
following:
1) To reduce the volatility on the NAV that arises from the mark
to market on its listed bond portfolio. Whilst the listed bonds do
present an attractive investment proposition in their own right, we
see the listed capital markets as remaining highly volatile for the
next few years, which negates the absolute return upside on this
bond portfolio
2) Continue to move the overall portfolio into relatively short
duration senior loans, with the ambition for RECI to become a "pure
play" senior lender, with no remaining mezzanine or market bond
positions
3) Advance its financial strength further with term matched financing
4) To continue to improve the dividend cover from net income
5) Cheyne Real Estate has continually expanded and improved on
its investor engagement and presentations. The current regime of
quarterly updates have been well received by investors for its
transparency and accessibility. We would like to continue these
efforts to improve engagement with investors.
Growth to capture the significantly higher rates of return
Cheyne's Real Estate business has seen substantial growth in its
senior lending book and has moved to capture a larger share of the
market with localised offices across Europe and by growing the
already well-established large team dedicated to real estate credit
origination and management. We have raised GBP2.5 billion from 30+
investors across the latest vintages of our private vehicles with
GBP2.0 billion committed over 23 deals in the first quarter of
2023. Cheyne's immediate pipeline of deals stands at GBP2.0 billion
with a weighted average LTV of 59% and unlevered IRR of 11.7%.
RECI needs to be in a position to continue to grow with the
wider Cheyne Real Estate business to capture the significantly
higher rates of return for senior loans available today.
To that end, it is our hope that the conditions return to allow
RECI to resume its path to growth. We are hopeful that the
continued proven performance, attractive dividends and extensive
investor engagement will see the share price close its current
discount to the NAV during this coming year, and allow RECI to
participate fully in Cheyne's attractive deal pipeline and wider
real estate business.
Portfolio Overview
Portfolio Highlights
New Commitments
GBP155.2m
Deals Funded
GBP158.6m
Repayments and Interest
GBP159.0m
Over the course of RECI's financial year, the portfolio has
continued its migration towards an all-senior loan book. As at 31
March 2023, senior loans represented 90.3% of the portfolio with a
weighted average LTV of 59.2%. The Top 10 positions are 100% senior
loans and new origination is entirely senior.
RECI also received cash repayments and interest of GBP159.0
million in this year, compared with GBP132.2 million in the year
ended 31 March 2022.
Commitments and Funding
During the year, the Company made GBP155.2 million of
commitments to eight new deals, and funded GBP158.6 million into
new and existing deals during the year, compared to GBP113.1
million in the previous year.
Of the eight new deals committed to in the year, the split of
fixed and floating rates was as follows:
Split of New Deals by Commitment
Value
-------------------------------------
Fixed 72,955,108 47.0%
----------- ----------------- -----
Floating 82,235,813 53.0%
----------- ----------------- -----
GBP155,190,921
----------- ----------------- -----
Portfolio Composition
Number of Positions
53
Total Committed Capital
GBP572.0m
Drawn Value inc Interest (gross of leverage)
GBP400.7m
Drawn Value (net of leverage)
GBP319.4m
RECI's investment portfolio, a diversified book of 53 positions
in real estate bonds and loans, was valued at GBP400.7 million per
FS including accrued interest as at
31 March 2023, up from GBP394.3 million as at 31 March 2022. The
portfolio had a weighted average levered yield of 11.1% and an
average loan to value of 59.2% as at 31 March 2023.
Portfolio by Geography
by % of Total Committed Capital
including PIK
%
Allocation Since
Mar-23 Mar-22
--------------- ----------- -------
United Kingdom 58.3% 13.7%
--------------- ----------- -------
France 23.8% (11.1%)
--------------- ----------- -------
Spain 7.5% (3.1%)
--------------- ----------- -------
Finland 3.7% (0.0%)
--------------- ----------- -------
Portugal 2.8% 2.8%
--------------- ----------- -------
Ireland 1.6% 0.0%
--------------- ----------- -------
Italy 1.2% (1.4%)
--------------- ----------- -------
Germany 1.1% (0.9%)
--------------- ----------- -------
Top 10 Positions
--------------------------------------------------------------------------------------------------- -----------------
Top 10 Positions1 as at 31 March 2023
--------------------------------------------------------------------------------------------------- -----------------
Description Commitment LTV Investment Strategy Sector Country Asset Type
--------------------- ---------- --- ------------------- -------------------- ---------------- -----------
1 UK Mixed-Use GBP83.0m 48% Senior Loan Mixed-Use United Kingdom Core+
Portfolio,
Predominantly
Office/Residential
--------------------- ---------- --- ------------------- -------------------- ---------------- -----------
London Student Student
2 Accommodation GBP45.2m 58% Senior Loan Accommodation United Kingdom Development
--------------------- ---------- --- ------------------- -------------------- ---------------- -----------
London Residential
3 Led Mixed-Use Scheme GBP32.7m 67% Senior Loan Residential United Kingdom Development
--------------------- ---------- --- ------------------- -------------------- ---------------- -----------
Office development in
4 Saint Ouen, Paris GBP30.9m 58% Senior Loan Office France Development
--------------------- ---------- --- ------------------- -------------------- ---------------- -----------
5 London Office GBP22.8m 59% Senior Loan Office United Kingdom Core
--------------------- ---------- --- ------------------- -------------------- ---------------- -----------
6 Spanish Villas GBP22.4m 49% Senior Loan Residential Spain Development
--------------------- ---------- --- ------------------- -------------------- ---------------- -----------
France Housebuilder
7 Portfolio GBP20.6m 36% Senior Loan Housebuilder France Development
--------------------- ---------- --- ------------------- -------------------- ---------------- -----------
8 Finland Hotel GBP20.4m 65% Senior Loan Hotel Finland Development
--------------------- ---------- --- ------------------- -------------------- ---------------- -----------
9 South of France Hotel GBP19.9m 80% Senior Loan Hotel France Development
--------------------- ---------- --- ------------------- -------------------- ---------------- -----------
Luxury Assisting
Living Units in
10 London GBP19.7m 60% Senior Loan Assisted Living United Kingdom Core+
--------------------- ---------- --- ------------------- -------------------- ---------------- -----------
1 Based on total commitment of bonds and loans.
--------------------------------------------------------------------------------------------------- -----------------
Portfolio by Sector
by % of Total Committed Capital including PIK
% %
Allocation Allocation
Mar-23 Mar-22
---------------------- ----------- -----------
Hotel 19.8% 22.6%
---------------------- ----------- -----------
Mixed-Use 17.1% 21.2%
---------------------- ----------- -----------
Student Accommodation 11.9% 10.2%
---------------------- ----------- -----------
Residential 11.8% 6.7%
---------------------- ----------- -----------
Office 11.6% 11.7%
---------------------- ----------- -----------
Co-Living 7.0% 3.2%
---------------------- ----------- -----------
Leisure 5.0% 2.4%
---------------------- ----------- -----------
Later Living 3.3% 0.0%
---------------------- ----------- -----------
Housebuilder 3.3% 4.8%
---------------------- ----------- -----------
Assisted Living 3.2% 3.2%
---------------------- ----------- -----------
Retail 1.3% 3.1%
---------------------- ----------- -----------
Logistics 2.0% 2.2%
---------------------- ----------- -----------
Land 1.9% 0.0%
---------------------- ----------- -----------
Industrial 0.8% 0.8%
---------------------- ----------- -----------
Healthcare 0.0% 7.9%
---------------------- ----------- -----------
Bilateral Loan and Bond Portfolio
The drawn balance of the bilateral loan and bond portfolio,
including accrued interest, had increased from GBP295.9 million as
at 31 March 2022 to GBP351.5 million as at 31 March 2023. The
average loan portfolio LTV exposure as at 31 March 2023 was 60.9%.
The portfolio continues to provide attractive risk-adjusted returns
with a weighted average unlevered yield of 9.5% per annum, before
any back-end fees, profit share or equity element contributions are
taken into account.
Bilateral Loan and Bond Portfolio Summary
as at 31 March 2023
--------------------------------------------
Number of loans 34
------------------------------------- -----
Drawn Value (GBP millions) 351.5
------------------------------------- -----
Undrawn Loan Commitments
(GBP millions) 168.3
------------------------------------- -----
Weighted average yield of
portfolio 9.5%
------------------------------------- -----
Weighted average yield of
portfolio (levered) 10.2%
------------------------------------- -----
Weighted average LTV of portfolio 60.9%
------------------------------------- -----
Weighted average life of
portfolio (years) 1.9
------------------------------------- -----
Market Bond Portfolio
As at 31 March 2023, the market bond portfolio of 19 bonds
(excluding the self-originated bonds) was valued at GBP49.2 million
including accrued interest, compared to GBP98.5 million as at 31
March 2022.
The remaining bond portfolio:
-- Is characterised by a short duration (2.5 years) and high coupon
-- Has a weighted average unlevered yield as at 31 March 2023 of
12.6%, and the weighted average levered yield of the bond portfolio
was 34.3%.
As described above, the Investment Manager has accelerated its
rotation of the portfolio from market CMBS to senior loans.
In the year ended 31 March 2023, GBP31.4 million notional of
bonds were sold at a slight discount to carrying value and a
further GBP16.4 million notional sold the following month, leaving
a bond portfolio of 15 positions and a notional of GBP41.5m,
representing just 8.7% of the portfolio as at 30 April 2023.
Market Bond Portfolio Summary
as at 31 March 2023
-----------------------------------------
Number of bonds 19
---------------------------------- -----
Fair Value (GBP millions) 49.2
---------------------------------- -----
Weighted average yield of
portfolio 12.6%
---------------------------------- -----
Weighted average yield of
portfolio (levered) 34.3%
---------------------------------- -----
Weighted average LTV of portfolio 48.8%
---------------------------------- -----
Weighted average life of
portfolio (years) 2.5
---------------------------------- -----
Environmental, Social and Governance (ESG)
Cheyne Capital and its Real Estate team remain committed to
operating its business in a progressively responsible manner,
achieved through the incorporation of high standards of governance
and investment stewardship. Cheyne aims for the consideration,
assessment and integration of Environmental, Social and Governance
(ESG) factors to be a core element of analysis undertaken in its
investment processes.
In the last year, Cheyne has engaged with an external Real
Estate ESG specialist consultant to assist with developing and
provide assurance on a comprehensive scorecard-based approach. The
ultimate aim is to align our principles with industry recognised
benchmark standards to identify a minimum ESG standard we will need
across our portfolio. The move to a more qualitative system will
significantly help us identify and understand ESG-based risks in
our portfolio more easily, and not only assist us with lowering
risk and increasing quality but will also help us collate and
measure the data required to track progress in what is a fast
moving but increasing important area of focus. We are currently in
the implementation phase of the project, which includes training
for the Real Estate team and wider Cheyne employees. Further
information can be found in the Sustainability Report on pages
32-36.
Outlook
Scaling the Company
UK and Western European Real Estate is transitioning to a new
"normal" and RECI is poised to benefit. We believe it is in the
Company's best interests to ensure the Company continues to be
ready to respond to the new opportunities we are seeing. We will
continue with our strategy of divesting the bonds in favour of the
higher returning senior loans which should in turn provide more
stability to RECI's NAV and share price.
Given the unprecedented and scalable opportunity, and the
appetite shown from investors by the amount raised by Cheyne's
private funds over the last two to three years, it remains the
ambition for RECI to echo that growth in the public markets.
Cheyne Capital Management (UK) LLP
21 June 2023
Business and Strategy Review
Stakeholder Engagement
The Board is committed to promoting the long-term success
of the Company whilst conducting business in a fair, ethical
and transparent manner.
Whilst directly applicable only to companies incorporated in the
UK, the Board recognises the intention of the AIC Code that matters
set out in section 172 of the Companies Act 2006 are reported on.
The Board strives to understand the views of the Company's key
stakeholders and to take these into consideration as part of its
discussions and decision-making process. As an investment company,
the Company does not have any employees and conducts its core
activities through third-party service providers. Each provider has
an established track record and through regulatory oversight is
required to have in place suitable policies and procedures to
ensure they maintain high standards of business conduct, treat
their own stakeholders fairly, and employ corporate governance best
practice. The Company strongly believes that fostering healthy and
constructive relationships with its broad range of stakeholders
should result in increased Shareholder value over the long
term.
Investors
Why they are important
------------------------------------------------------------------------------------------------------------
The Board believes that the maintenance of good relations with Shareholders
is important for the long-term prospects of the Company and seeks
engagement with investors.
------------------------------------------------------------------------------------------------------------
How the Board engages
------------------------------------------------------------------------------------------------------------
The Directors and Cheyne are committed to providing detail and transparency
regarding the Company's portfolio and investment strategy, allowing
all investors to focus upon RECI and its merits and opportunities,
notwithstanding the broader market environment. Where appropriate,
the Chairman and other Directors are available for discussion about
governance and strategy with major Shareholders and the Chairman ensures
communication of Shareholders' views to the Board. The Board receives
feedback on the views of Shareholders from Liberum Capital Limited
(the "Corporate Broker") and the Investment Manager, and Shareholders
are welcome to contact the Chairman or any Director at any time via
the Company Secretary.
------------------------------------------------------------------------------------------------------------
Key activities during the year
------------------------------------------------------------------------------------------------------------
AGM Publications Events
The Directors believe The Company reports to Throughout the last financial
that the AGM provides Shareholders with both year, the Investment
an appropriate forum monthly fact sheets and Manager continued to
for Shareholders to quarterly update presentations, provide a detailed and
communicate with the along with the Annual comprehensive review
Board and encourages and interim reports. of RECI's portfolio as
participation. There These are available on part of our programme
is an opportunity for the Company's website: of enhanced investor
individual Shareholders https://realestatecreditinvestments.com/ communication. A number
to question the Chairmen In accordance with the of online events and
of the Board and the EU Packaged Retail and meetings were held to
Audit and Risk Committee Insurance-based Investment maintain a regular dialogue
at the AGM. The Board Products Directive on with our Shareholders
assesses the results 1 January 2018, a Key and potential new investors.
of AGMs considering Information Document is In addition, the Board
whether the number of available on the Company's continues to work with
votes against or withheld website. its service providers
in respect of resolutions to enhance the Company's
are such as to require website and fact sheet.
discussion in the subsequent
Annual Report.
----------------------------- ----------------------------------------- ------------------------------
Community and Environment
Why they are important
--------------------------------------------------------------------------------
In carrying out its activities, the Company aims to conduct itself
responsibly, ethically and fairly. The Directors recognise the importance
of environmental, social and governance factors, including climate
change, when pursuing the Company's Investment Objective and in the
selection of the service providers and advisers the Company works
with. The Board is alive to the magnitude of the evolving ESG landscape.
It has determined that ESG considerations, and their communication,
must be fundamental to all its operations and has consequently nominated
an ESG lead to co-ordinate and drive internal discussion. The Board,
in conjunction with the Investment Manager, continues to closely monitor
upcoming regulation and any developments in this area.
--------------------------------------------------------------------------------
How the Board engages
--------------------------------------------------------------------------------
Reflecting this, the Board has asked Colleen McHugh to take up the
role of "ESG Lead" and work closely with Cheyne in developing and
implementing RECI's ESG approach. Pages 32-36 of the Sustainability
Report provide further information about the Company's and the Manager's
approach to ESG matters.
--------------------------------------------------------------------------------
Key activities during the year
--------------------------------------------------------------------------------
The Investment Manager has now engaged an external Real Estate ESG
specialist consultant to assist with developing and provide assurance
on a comprehensive scorecard-based approach using a borrower questionnaire
for each deal. The questions in Cheyne's borrower questionnaire have
been grouped and weighted to enable a proprietary 0-5 scoring against
the following Target Characteristics:
* E1 Commitment to Environmental Risk Monitoring
* E2 Contribution to Positive Environmental Action
* S1 Supporting Social Wellbeing
Qualifying Investments achieve a score of 3 or higher on at least
one of the Target Characteristics.
Cheyne will specify that a minimum 50% of the portfolio will comprise
Qualifying Investments (based on investment commitments at each calendar
year end). In practice, the Investment Manager expects the portfolio
average scores to be higher.
The ultimate aim is to align the Investment Manager's principles with
industry recognised benchmark standards to identify a minimum ESG
standard needed across RECI's portfolio. The move to a more qualitative
system will significantly help the Investment Manager identify and
understand ESG based risks in its portfolio more easily, and not only
assist with lowering risk and increasing quality, but will also help
collate and measure the data required to track progress in what is
a fast moving but increasing important area of focus. The Investment
Manager is currently in the implementation phase of the project, which
will include training for the Real Estate team and wider Cheyne employees.
Additionally, the Company has decided to purchase carbon offsets for
all flights that may be required by the Directors and the Investment
Manager, thereby facilitating a carbon neutral position, as pertains
to travel. The Company recognises that this action is the first step
in an evolving climate strategy, that should encompass carbon removal
as well as carbon offsets.
Further efforts to reduce its carbon footprint, constitute electronic
only communications to all Shareholders on the share registrar. Accordingly,
the Company's website is now the default method of communication for
Shareholder publications. Currently approximately 89% of the Company's
Shareholder register receive documents and other communications electronically.
--------------------------------------------------------------------------------
Service Providers
Why they are important
--------------------------------------------------------------------------------
Effective relationships with service providers help the Company achieve
its objectives, including its investment objectives and to operate
in an efficient and compliant manner.
Commercial service providers: Investment Manager, Administration agent,
Corporate broker, Legal advisers, Auditor and Key service providers
retained, providing continuity of service and familiarity with the
objectives of the Company.
The Audit and Risk Committee receives information from the Company's
service providers with the majority of information being directly
sourced from the Company Secretary, Administrator, the Investment
Manager and the external auditor.
--------------------------------------------------------------------------------
How the Board engages
--------------------------------------------------------------------------------
The Management Engagement Committee meets at least once a year for
the purpose of evaluating the performance of the Company's service
providers, the review of service agreements and service level statements
and the level and method of their remuneration. The Audit and Risk
Committee considers the nature, scope and results of the auditor's
work and reviews its performance annually prior to providing a recommendation
to the Board on the reappointment or removal of the auditor.
--------------------------------------------------------------------------------
Key activities during the year
--------------------------------------------------------------------------------
The Board has detailed and constructive discussions with some service
providers regarding service provision and fees. Details of the responsibilities
of the Investment Manager, Investment Advisor, Link Asset Services
(Registrar), and Aztec Financial Services (Guernsey) Ltd (Company
Secretary) can be found on page 111. Other service providers include
our corporate broker, lenders, auditors, counsel and other advisors.
--------------------------------------------------------------------------------
Business and Strategy Review
Sustainability Report
RECI's Approach To Sustainability
RECI aims to operate in a responsible and sustainable manner
over the long term. The Company prioritises continuous enhancement
of ESG credentials across the portfolio, and its success is aligned
with the delivery of positive outcomes for all its stakeholders,
not least the communities in which the buildings that it finances,
live, work and enjoy.
The Company's main activities are carried out by Cheyne, the
Investment Manager, and as such the Company adopts the Investment
Manager's policy and approach to sustainability and integrating ESG
principles.
The Investment Manager was one of the initial signatories to the
Standards Board for Alternative Investments (formerly known as the
Hedge Fund Standards Board) and is a signatory to the United
Nations-supported Principles for Responsible Investment ("PRI"). In
its most recent assessment, Cheyne scored 4 stars out of 5 in all
modules bar one. Cheyne received a score of 68% (4 stars out of 5)
in the Investment and Stewardship Policy module (where the PRI
median was 62%). Over 40% of its sub-indicators in this module
received a perfect score.
Several standards and codes have received prominence as metrics
for investment managers. These include, for example, the UN
Principles for Responsible Investment (UN PRI), the Task Force on
Climate-related Financial Disclosures (TCFD), the Financial
Reporting Council's Stewardship Code, and the FCA's Sustainability
Disclosure Requirements (SDR).
The Investment Manager's ESG Implementation Forum oversees both
the Responsible Investment and ESG policies to ensure that it
continuously improves its ESG standards. Its Responsible Investment
policy is already incorporated into its investment process.
Cheyne Real Estate Core ESG Principles
Cheyne believes that an overarching focus on ESG considerations
is entirely aligned with our investment goals.
-- Sustainability credentials directly support real estate valuations
-- Sustainable, energy efficient buildings are more valuable to asset owners by:
o Supporting higher rents, lower vacancies and lower operating
costs
o Supporting exit valuations.
ESG considerations in our investments are not merely a passive
analysis but rather the opportunity to effect positive change.
-- Cheyne Real Estate is a key stakeholder in our investments,
frequently the sole lender to a real estate asset
-- This provides the ability to directly engage with all new
sponsors to help drive the ESG agenda directly and seek to address
any deficiencies and opportunities to improve sustainability
credentials of the asset
-- This is particularly relevant in development, value-add and
transitional financing, which represents a core focus for Cheyne
Real Estate.
Cheyne's Partnership with Evora Global
ESG considerations have formed a key part of Cheyne's approach
to investments in real estate for many years. In February 2022,
Cheyne partnered with Evora, widely recognised as one of the
leading sustainability consultancy specialists to the real estate
industry, to formalise its approach to the incorporation of
sustainability considerations into the investment process.
The ongoing partnership with a leading external specialist is
expected to enable Cheyne to remain at the forefront of the rapidly
evolving ESG agenda and provide an independent checkpoint to
challenge their ESG investment process and ensure robustness.
Cheyne has taken a staged approach in developing its ESG
strategy, with its philosophy drawing on the following four
drivers:
1. The Greater Good
2. Value Enhancement/Risk Management
3. Regulation
4. Investor Expectations
Cheyne has worked with Evora to prepare customised ESG
questionnaires for each of the real estate asset types the Cheyne
real estate lending funds finance: standing, refurbishment and
development assets, together with a borrower questionnaire. An ESG
data template has also been prepared (one template for all asset
types).
The questionnaires seek to quantify each investment's
performance against key ESG criteria, utilising a consistent
approach to enable aggregation across the assets within the
relevant Cheyne fund. The score is set at a stringent enough level
to effect a conversation about enhancing the ESG characteristics if
they are not up to Cheyne's standards.
The questionnaires are used by Cheyne's analysts to undertake a
broad based ESG evaluation of a proposed investment - focusing on
both the sponsor and the asset itself.
Standards and Guidance
A range of external guidance and best practice standards have
been used to inform the development of the ESG questionnaires,
including:
Global Real Estate Sustainability Benchmark (GRESB)
-- Building Research Establishment Environmental Assessment Method (BREEAM)
-- EU Taxonomy
-- Sustainable Finance Disclosure Regulations (SFDR)
-- Minimum Energy Efficiency Standards (MEES)
Incorporating Sustainability into the Investment Process
Due Diligence
RECI is primarily invested in real estate loans and other real
estate-based debt investments. Key factors taken into
consideration, where appropriate and possible, are best-in-class
environmental, design and construction standards, a focus on
Building Research Establishment Environmental Assessment "BREEAM"
ratings, governance rights and engagement with sponsors.
Sustainability risks are considered during the Investment Manager's
initial due diligence in respect of an investment opportunity,
including as part of the external valuations of the real estate
being financed (such valuations typically consider any
environmental and/or social risks) and early engagement with
potential borrowers or issuers through a data gathering
exercise.
The Investment Manager's analysts also compile reports using
data gathered from their own due diligence and external reports,
environmental performance indicators (including BREEAM ratings and
Energy Performance Certificates) and investigations (including
through the use of forensic accountants and other third-party
consultants). This information is included in the investment
committee memorandum, which is considered by the Investment
Manager's investment committee prior to an investment being
made.
Decision-Making Process
Sustainability risks are considered as part of the investment
decision-making process for RECI. In particular, the following
sustainability risks are typically considered, both in respect of
the real estate being financed and/or the relevant borrower or
issuer:
-- Environmental: power generation (including its
sustainability), construction standards, water capture, energy
efficiency, land use and ecology and pollution.
-- Social: affordable housing provisions, community interaction
and health and safety conditions.
-- Governance: management experience and knowledge and
anti-money laundering, corruption, and bribery practice.
Ongoing Management
Sustainability risks also form part of the ongoing monitoring of
RECI's investments, with regular reports and ongoing engagement
from borrowers and issuers incorporating information related to
sustainability risks provided to the Investment Manager. Where
appropriate, the investment team will assist borrowers and issuers
in addressing ESG-related issues and support its borrowers' and
issuers' efforts to report externally and internally on their ESG
approach and performance in relation to material sustainability
risks.
Exit
ESG considerations are already having an impact on underlying
real estate values and whilst clear data driven evidence is in its
infancy, the investment manager is acutely aware that during the
life of the loans that RECI is writing, this will become much
clearer. As such this is an important consideration regarding risk
analysis now, hence the approach above is an integral tool when
calculating, managing and measuring risk.
Responsible Investment Highlights 2023
Investment example 1
Riverstone Kensington, Senior Living Development, UK
Environmental
-- There are a number of initiatives to promote energy
efficiency including motion sensor lighting and operating electric
vehicles/providing EV charging points. Targeted BREEAM Excellent
rating.
Social
-- The property is looking to address a shortage of
assisted-living retirement units in London for residents who are
+65 years old and want to remain within central London.
Governance
-- Riverstone is governed by an experienced team and Board which
has put in place policies to ensure the health and safety of its
residents' wellbeing are at the core of its agenda.
-- The building has been built to the highest regulations and
will adhere to the highest standards of care, providing an
ergonomic and age-appropriate design to reduce the risk of
accidents and facilitate independence for longer.
Investment example 2
Fusion Brent Cross, Student Accommodation Development, UK
Environmental
-- Zero carbon heating will service the site which will lead to
a reduction in operating carbon emissions.
-- There will also be a green roof, rainwater recovery systems,
green electrical utility provider and a 'zero waste' shop on
site.
-- Brent Cross Town will aim to achieve net zero carbon by 2030.
-- BREEAM Excellent rating, with Cheyne currently considering
further funding to support the improvement to BREEAM
Outstanding.
Social
-- The accommodation will create a social hub for students with
an emphasis on wellbeing and physical and mental health for
students. There will be outdoor and relaxation spaces, with the
wider Brent Cross scheme creating a new community space for local
residents.
Governance
-- Fusion have teamed up with Health Assured in April 2020 to
provide employees with a wellbeing platform and complete support
network for personal and professional problems.
Outlook and Focus Areas 2023 and Beyond
The Company knows that its Shareholders, including the Directors
of your Company, see attention to ESG factors as critical in its
assessment of Cheyne as investment manager. The Company expects ESG
to remain a dominant theme within the financial services industry
going forward; the course being taken by regulators suggests that
its importance will only increase in years to come; the research
process and the investment judgements the Company makes will
continue to reflect that and to evolve as necessary.
The continuing evolution is demonstrated through the Investment
Manager making progress towards completing its ESG framework which
will form the basis of an evaluation tool to influence investment
decisions from an ESG perspective for new projects.
This next phase of its ESG evolution will involve the
implementation of a more rigorous scoring-based system with the aim
of using capital invested to finance strategies/ projects that
adhere to robust ESG principles. The Manager firmly believes that
adopting this approach will:
-- Enhance the quality of the portfolio and help to protect value;
-- Stay ahead of investor demand to invest in sponsors that have
a plausible and demonstrable ESG strategy;
-- Use capital to drive/accelerate change in the Real Estate arena in regard to ESG; and
-- Provide a measurable approach to understanding the ESG dynamics of our portfolio.
These efforts will allow the Investment Manager to influence
borrowers and to improve the ESG standards of projects which they
fund. The framework should be finalised in 2023. It is intended to
be incorporated into the investment process slowly, beginning in
early 2024.
Looking ahead, one of the main focuses will be on new regulatory
requirements. Next year the Investment Manager will advance its
reporting under the TCFD framework.
In addition, the UK's regulatory framework Sustainability
Disclosures Requirements ("SDR") comes into force in stages from
later this year. The Investment Manager is working closely with
relevant parties to ensure that it is meeting the necessary
regulatory requirements.
ESG subsequent covenants/conditions may well also be included in
time, driven by risk management principles.
Further details on Cheyne's ESG policy can be found on its
website.
https://www.cheynecapital.com/investmentstrategies/real-estate/investing-responsibly/
Annual Report and Accounts 2023
Governance
In this section
Board of Directors
-----------------------------------
Management Team
-----------------------------------
Directors' Report
-----------------------------------
Remuneration Committee Report
-----------------------------------
Corporate Governance Statement
-----------------------------------
Audit and Risk Committee Report
-----------------------------------
Directors' Responsibility Statement
-----------------------------------
Board of Directors
Bob Cowdell
Chairman (UK resident)
Bob Cowdell is an independent non-executive director who has
focused on the financial sector throughout his career; initially as
a solicitor and then as a corporate broker and adviser. He was
previously co-founder and Head of the ABN AMRO Global Investment
Funds Team and then Head of Financials at RBS Hoare Govett.
He is currently chairman of Castel Underwriting Agencies Limited
and a non-executive director of Thomas Miller Holdings Limited; and
a former non-executive director of Baillie Gifford UK Growth Fund
Plc, Catlin Underwriting Agencies Limited, Catlin Insurance Company
(UK) Limited, XL London Market Limited and XL Insurance Company SE.
A Freeman of the City of London, he is a member of the Institute of
Directors and the Chartered Insurance Institute. He has been a
member of the Board since June 2015.
Susie Farnon
Chairman of the Audit and Risk Committee (Guernsey resident)
Mrs Farnon is a Fellow of the Institute of Chartered Accountants
in England and Wales and qualified as an accountant in 1983. She is
a former Banking and Finance partner of KPMG Channel Islands from
1990 until 2001 and head of the Channel Island Audit Practice from
1999. She has served as President of the Guernsey Society of
Chartered and Certified Accountants and as a member of the States
of Guernsey Audit Commission and as vice-chairman of the Guernsey
Financial Services Commission. Susie is a non-executive director of
a number of investment companies listed on the London Stock
Exchange or elsewhere and is a board member of the Association of
Investment Companies. She has been a member of the Board since
February 2018.
John Hallam
Senior Independent Director (Guernsey resident)
Mr Hallam is a Fellow of the Institute of Chartered Accountants
in England and Wales and qualified as an accountant in 1971. He is
a former partner of PricewaterhouseCoopers having retired in 1999
after 27 years with the firm both in Guernsey and in other
countries.
He is the chairman of NB Distressed Debt Investment Fund Ltd as
well as being a director of a number of financial services
companies, some of which are listed on recognised stock exchanges.
He served for many years as a member of the Guernsey Financial
Services Commission from which he retired in 2006, having been its
chairman for the previous three years. He has been a member of the
Board since March 2016.
Colleen McHugh
Independent Director (Guernsey resident)
Mrs McHugh is acting Chief Investment Officer of Wealthify (part
of the Aviva PLC group) a UK regulated digital adviser. Prior to
this she was managing director of 1818 Venture Capital, a licensed
asset manager based in Guernsey. She is a non-executive director
for private investment funds, and a Guernsey licensed commercial
insurance company. Colleen has over 20 years' experience in the
investment and financial services industry having worked
predominantly as an Investment Manager and Private Banker for
publicly listed banks such as HSBC, Barclays and Butterfield Bank,
across several regions, but with a focus on international financial
centres. She holds an economics degree from the University of
Ireland (Galway) and a MBA from the University of London. Colleen
is a Chartered Wealth Manager and a fellow of the Chartered
Institute of Securities and Investment. She recently obtained her
ESG certification from the CFA Institute. She has been a member of
the Board since March 2021.
Management Team
Ravi Stickney
Head of Cheyne Real Estate/Portfolio Manager
Ravi is Head of the Real Estate Team. He joined Cheyne in 2008
and has 20 years' experience in the real estate debt markets.
Previously, he was on ING Bank's proprietary investments desk (2005
to 2008), with sole responsibility for managing a EUR400 million
long/short portfolio of European commercial real estate credits and
CMBS. Prior to that, he was at Lehman Brothers (2002 to 2005),
structuring and executing UK and European CMBS/RMBS and commercial
real estate mezzanine loans. He acted as sole operating adviser on
the restructuring and eventual sale of the first distressed UK CMBS
deal, and he continues to play an active role in the direction of
various distressed European real estate credits. He began his
career on the UK commercial real estate desk at Ernst & Young
in 1998.
Richard Lang
Head of Business Mngt/Co-Portfolio Manager
Richard is Business Manager of the real estate desk, and is a
partner at Cheyne, having joined in 2007. Before joining Cheyne,
Richard worked at Barclays Capital, and prior to that was at
Deutsche Bank, where he was responsible for the controlling of the
commercial mortgage backed securities and Securitised Products
businesses. Before that, he worked in management roles within the
fixed income areas of RBS and Paine Webber. He is a Fellow of the
Institute of Chartered Accountants in England and Wales, having
qualified as a chartered accountant in 1999.
Arron Taggart
Head of UK
Arron has over 25 years' experience in the real estate markets.
He joined Cheyne in August 2012 to originate real estate loans in
the UK and Northern Europe. Prior to Cheyne, Arron was a Property
Specialist and Partner at Clydesdale Bank responsible for the
origination and execution of real estate loans in London and the
South of England. He was also responsible for the management of the
loan portfolio and setting regional strategy. Prior to Clydesdale
Bank, he was at Bank of Scotland and Hitachi Capital.
Raphael Smadja
French Origination
Raphael joined Cheyne in January 2014 and has 20 years'
experience. Prior to Cheyne, he was an Associate Director in Real
Estate Finance at Deutsche Pfandbriefbank, responsible for sourcing
and structuring commercial real estate loans across Europe. Prior
to that, he held positions within the Real Estate Finance and CMBS
space at Moody's, UBS and Morgan Stanley.
Daniel Schuldes
European Origination
Daniel has over 18 years' experience in the European real estate
debt and ABS markets. He joined Cheyne in 2007 and specialises in
the origination, structuring, negotiation and execution of German
real estate credit transactions. He was previously an associate on
Credit Suisse's asset finance team in London, which was responsible
for originating and structuring the bank's European
securitisations. He focused on fundamental analysis of RMBS
collateral.
Sa'ad Malik
Structured Credit
Sa'ad joined Cheyne in 2016. Prior to joining Cheyne, he founded
Rhino Investment Management LLP in 2011, an FCA-authorised boutique
investment and advisory firm, active in the European commercial
real estate market. Among his responsibilities were strategy,
origination, client management, structuring and execution. He
previously worked for Lehman Brothers International (Europe) in
2004, and for Credit Suisse Securities (Europe) Limited in 2005,
when he was Director in their European Real Estate Finance &
Securitisation area, and had a central role in building the Titan
Europe CMBS platform. Sa'ad started his career in 2000 with
Commerzbank Securities in Asset Backed Finance.
Lydia Boos
Legal Counsel
Lydia is Legal Counsel for the Cheyne Real Estate Team. Prior to
joining Cheyne in 2018, Lydia was a senior associate at Bryan Cave
Leighton Paisner LLP where she worked since starting her legal
training in 2008. Lydia joined BCLP's real estate finance
department upon qualifying as a solicitor in September 2010. At
BCLP, Lydia was responsible for advising a range of lender and
sponsor clients on real estate focused investment and development
transactions across a variety of sectors, often including complex
intercreditor structures.
Sophie Turner
Business Manager
Sophie is a Business Manager for the Real Estate Team focusing
on Investor Relations for RECI. Prior to this, Sophie worked at
Cheyne in Investor Relations as Client Services Manager and Product
Specialist for Convertible Bonds, and before that, as Assistant
Business Manager for the Real Estate Team. Prior to joining Cheyne
in 2008, she worked at the University of Exeter's Business School,
co-ordinating executive education programmes for corporates such as
3i plc. Sophie earned her BSc in Business Administration from
Cardiff University.
Directors' Report
The Directors present their Annual Report and the audited
financial statements for the year ended 31 March 2023.
General Information
The Company was incorporated in Guernsey on 6 September 2005
with registered number 43634.
The "About the Company" section of the Annual Report on page 6
provides information regarding the structure of the Company, the
investment objective and the listing details of the shares of the
Company.
The Company's investment management activities are managed by
the Investment Manager, who is also the Alternative Investment Fund
Manager ("AIFM"). The Company has entered into an Investment
Management Agreement under which the Investment Manager manages its
day-to-day investment operations, subject to supervision by the
Company's Board of Directors. The Company is an Alternative
Investment Fund ("AIF") within the meaning of the Alternative
Investment Fund Managers Directive ("AIFMD") and accordingly the
Investment Manager has been appointed and registered as the AIFM of
the Company.
Principal Activity and Business Review
The principal activity of the Company during the year was that
of an investment company investing in real estate credit
investments. For full details of the Investment Policy of the
Company see page 6.
Results and Dividends
The results for the year and the Company's financial position as
at year end are shown on pages 72 and 73. Dividends totalling
GBP27.5 million (31 March 2022: GBP27.5 million) were paid on the
shares during the year.
A fourth interim dividend for the year ended 31 March 2023 of 3
pence per share (31 March 2022: 3 pence per share) was declared by
the Directors on 21 June 2023 and is payable on 28 July 2023. This
fourth interim dividend has not been included as a liability in
these financial statements.
Capital Structure
Details of the authorised, issued and fully paid share capital,
together with details of the movements in the Company's issued
share capital during the current and prior year, are shown in Note
14 to the financial statements.
The Company has one class of shares which carry no right to
fixed dividends. Each share carries the right to one vote at
general meetings of the Company.
No person has any special rights of control over the Company's
share capital.
Board of Directors
The Board appoints all Directors on merit. When the Nomination
Committee considers Board succession planning and recommends
appointments to the Board, it takes into account a variety of
factors. Knowledge, experience, skills, personal qualities,
residency and governance credentials play an important part.
The Directors of the Company who served during the year and to
the date of this report were:
Bob Cowdell (Chairman)
Susie Farnon
John Hallam
Colleen McHugh
The following summarises the Directors' directorships in other
public companies listed on the London Stock Exchange:
Director Company Name
------------ -------------------------
Susie Farnon Apax Global Alpha Limited
Ruffer Investment
Company Limited
------------ -------------------------
John Hallam NB Distressed Debt
Investment Fund Ltd
------------ -------------------------
All Directors are independent of the Investment Manager and free
from any business or other relationship that would materially
interfere with the exercise of their independence.
With regard to the appointment and replacement of Directors, the
Company is governed by its Articles of Incorporation (the
"Articles") and the Companies (Guernsey) Law, 2008. The Articles
themselves may be amended by special resolution of the
Shareholders. The powers of Directors are described in the Articles
and in the financial statements in the Corporate Governance
Statement. Under its Articles, the Company has authority to issue
an unlimited number of shares of no par value.
The Directors' interests in the share capital of the Company
(some of which are held directly or by entities in which the
Directors may have a beneficial interest) as at the publication
date are:
Number % Shares
of Shares Held
----------------------- ---------- --------
Bob Cowdell (Chairman) 215,000 0.09%
----------------------- ---------- --------
Susie Farnon 45,250 0.02%
----------------------- ---------- --------
John Hallam 135,000 0.06%
----------------------- ---------- --------
Colleen McHugh 30,000 0.01%
----------------------- ---------- --------
Substantial Interests in Share Capital
Chapter 5 of the Disclosure and Transparency Rules requires
disclosure of major Shareholder acquisitions or disposals (over 5%
of the shares) in the Company (see list below of major
Shareholders). During the year, there was one notification of such
a transaction (31 March 2022: five notifications).
List of major Shareholders as at 31 March 2023:
Name Total Shares % Shares
Held Held
-------------------------- ------------ --------
Close Brothers Group 21,059,141 9.18
-------------------------- ------------ --------
Bank Leumi Le Israel 18,054,468 7.87
-------------------------- ------------ --------
Hargreaves Lansdown
Asset Mgt 14,453,888 6.30
-------------------------- ------------ --------
Canaccord Genuity Group
Inc 13,315,151 5.81
-------------------------- ------------ --------
Tilney Smith & Williamson 13,288,277 5.79
-------------------------- ------------ --------
Fidelity Worldwide
Investment (FIL) 11,871,829 5.18
-------------------------- ------------ --------
Issued Share Capital
The issued share capital of the Company consisted of 229.3
million shares (31 March 2022: 229.3 million shares).
Directors and Officers Liability Insurance
Directors and Officers liability insurance is in place and was
renewed on 6 July 2022.
Listing Information
The shares are currently listed on the premium segment of the
Official List of the UK Listing Authority and trade on the Main
Market of the London Stock Exchange.
Website
The Directors are responsible for the oversight of the website
and delegate to Cheyne responsibility for the maintenance and
integrity of the financial and corporate information included on
it.
The Investment Manager
Having reviewed the performance of the Investment Manager, the
Directors are satisfied that the continued appointment of the
Investment Manager on the terms agreed is in the best interests of
the Shareholders and the Company. The Company has entered into the
Investment Management Agreement under which the Investment Manager
manages its day-to-day investment operations. Details of the
Investment Management Agreement can be found in Note 18 to the
financial statements.
Auditor
Deloitte LLP has been the Company's external auditor since the
Company's incorporation and in line with best practice, the
Company's lead audit partner is required to rotate off after five
years of service. Further information on the work of the auditor is
set out in the Audit and Risk Committee Report.
The Audit and Risk Committee reviews the appointment of the
auditor on an annual basis.
Principal Risks and Uncertainties
Principal risks and uncertainties are discussed in the Strategic
Report.
Related Party Transactions
Related party transactions are disclosed in Note 18 to the
financial statements. There have been no material changes in the
related party transactions described in the last annual report.
Going Concern
The Directors believe it is appropriate to adopt the going
concern basis in preparing the financial statements as, after due
consideration, they consider that the Company has adequate
resources to continue in operational existence for a period of at
least 12 months from the date of signing the audited financial
statements.
As highlighted in the long-term viability section in the
Strategic Report, the Investment Manager performed an evaluation of
each of its positions, taking into account all relevant
geopolitical and macro economic risks, on its operating models and
valuations, and performed a granular analysis of the future
liquidity profile of the Company. A detailed cash flow profile of
each investment was completed, incorporating the probability of
likely delays to repayments, other stress tests (and additional
cash needs). Stress testing is then performed on this cash flow
forecast against a number of adverse scenarios, such as the fair
value write down of the investments, or reduced cash flows from the
investment portfolio. The fair value stress test was considered
relevant to factor in any potential events affecting the underlying
assets or credit concerns about the borrowers which potentially
could impact on the fair value. The reduced cash flow stress test
was considered relevant in the event of potential defaults arising
on the loan portfolio and the inability to recover the interest or
principal back in full.
Taking account of the updated forecasting, the Directors
consider that the cash resources available as at 31 March 2023 of
GBP14.1 million, together with the cash held at the broker of
GBP2.4 million, the liquidity of the market bond portfolio and the
financing available through activities such as repurchase
agreements are sufficient to cover normal operational costs, the
funding of borrower loan commitments and current liabilities,
including the proposed dividend, as they fall due for a period of
at least 12 months from the date of signing the audited financial
statements. The Directors note that a key assumption adopted in the
going concern analysis is that leverage through repurchase
agreements is not withdrawn. Net debt (leverage minus cash) as at
31 March 2023 was 19.1%. The Directors consider this to have
strengthened the resilience of the Company to future market
uncertainty.
For further information, please refer to Note 2 to the financial
statements.
AGM
It is intended that the AGM of the Company will be held at
10:30am on 15 September 2023 and details of the resolutions to be
proposed at the AGM, together with explanations, will appear in the
Notice of Meeting to be distributed to Shareholders together with a
copy of this Annual Report. Members of the Board will be in
attendance at the AGM and will be available to answer Shareholder
questions.
On behalf of the Board on 21 June 2023.
Bob Cowdell Susie Farnon
Director Director
Remuneration Committee Report
As in other areas of corporate governance, the Company seeks to
adhere to the AIC Code of Corporate Governance issued in February
2019 and has established a Remuneration Committee. Although the
Company is not incorporated in England and Wales it is mindful of
the regulations that apply to such companies in the context of
remuneration and will seek to make appropriate disclosures. All
Directors are non-executive and are not eligible for bonuses,
pension benefits, share options, long-term incentive schemes or
other benefits, performance related or otherwise. Directors do not
have service contracts and there is no provision for compensation
for loss of office. All Directors are entitled to be repaid all
expenses reasonably incurred in the performance of their duties and
have signed a letter of appointment setting out the terms of such
appointment.
The prime purpose of the Committee is to determine the Company's
remuneration policy within the limits set by the articles of
incorporation which currently state that the remuneration paid to
each Director by way of fees shall not exceed EUR160,000 in any
financial year. Additionally, they provide that if any Director
performs any special duties, or renders services, outside of the
ordinary duties of a Director, that Director shall be paid such
reasonable additional remuneration as the Board may determine. The
Committee is authorised by the Board to seek, subject to a
financial limit, such independent advice as it may deem necessary
in the discharge of its responsibilities.
Composition of the Remuneration Committee
The Committee is chaired by John Hallam, the Company's senior
independent Director and is composed of all the Directors including
the Chairman of the Company, who was deemed independent at the time
of his appointment. This membership is considered appropriate as,
collectively, its members are believed to have the necessary
experience and knowledge to fairly determine remuneration.
Remuneration Policy
The current policy adopted by the Committee is set out below and
will be tabled at the next AGM for approval by Shareholders along
with this Report. The Company's Remuneration Policy is that fees
payable to the Directors should reflect the experience and
expertise of and the responsibilities borne by the Directors and
the time spent on the Company's affairs and be sufficient to
attract, retain and motivate individuals of high calibre with
suitable skills, experience and knowledge and to ensure that their
remuneration is set at a reasonable level commensurate with their
duties and responsibilities. No element of the Directors'
remuneration is performance related.
In determining the level of these fees, the Committee obtains
and takes account of reliable, up-to-date information about
remuneration in other companies of comparable scale and complexity
together with general economic conditions. To help it fulfil its
obligations, the Committee shall have full authority to appoint
remuneration consultants and to commission or purchase any reports,
surveys or information which it deems necessary.
Implementation of the policy
The last major review of Board remuneration took place in 2022
and it is anticipated that the next will be in 2025. In the
interim, the Committee notes that during the year ended 31 December
2022, Guernsey RPIX increased by 8.5% and therefore has recommended
that the Chairman's fee be increased from GBP80,000 to GBP86,800
(an increase of 8.5%) and the base fee for other Directors move
from GBP38,500 to GBP41,750 (an increase of 8.4%) to reflect
this.
As a consequence of these recommendations, the following table
sets out the remuneration of Board members for the financial year
ending 31 March 2024 as compared to the two previous years; it
should be noted that the additional fees set last year, and which
remain unchanged, relate to the roles performed and not to specific
individuals while the table below assumes that the named
individuals will discharge the roles indicated throughout the
coming year.
Furthermore, the Committee noted that, in the year ended 31
March 2020, additional fees had been paid to the Chairman
(GBP10,000) and other Directors (GBP5,000 each) for work in
relation to the issuance of a prospectus. It is the Committee's
recommendation that should a prospectus be issued during the
financial year ending 31 March 2024, additional fees of the same
amount should be paid.
Statement of Shareholder voting
At the last AGM held on 15 September 2022, a resolution to
approve the Remuneration Committee Report and Remuneration Policy
was passed with 79,602,454 votes (99.93%) being cast in favour and
49,997 votes (0.06%) against.
Future Reviews
It is anticipated that full reviews will not take place at less
than three-yearly intervals but that the Committee will, in the
early part of each year, review the changes in Guernsey RPIX to
determine if it is appropriate to increase the Chairman's fee and
the base fee for other Directors.
Year Year ending Year ended
ending 31 Mar 31 Mar
31 Mar 2023 2022
2024 GBP GBP
GBP
------------------------------------------------------ ------- ----------- ----------
Bob Cowdell (Chairman and Nomination Committee Chair) 86,800 80,000 75,000
------------------------------------------------------ ------- ----------- ----------
Susie Farnon (Audit and Risk Committee and Management
Engagement Committee Chair) 56,250 53,000 46,750
------------------------------------------------------ ------- ----------- ----------
John Hallam (Remuneration Committee Chair and Senior
Independent Director) 44,250 41,000 36,750
------------------------------------------------------ ------- ----------- ----------
Colleen McHugh (Environmental, Social and Corporate
Governance Lead) 44,250 41,000 36,750
------------------------------------------------------ ------- ----------- ----------
John Hallam
Remuneration Committee Chair
21 June 2023
Corporate Governance Statement
Statement of Compliance with Corporate Governance
The Company is a member of the Association of Investment
Companies (the "AIC") and by complying with the February 2019
edition of the AIC code of Corporate Governance for investment
companies ("AIC Code") is deemed to comply with both the UK and
Guernsey Codes of Corporate Governance.
To comply with the UK Listing Regime, the Company must comply
with the requirements of the UK Corporate Governance Code.
The Board has considered the principles and recommendations of
the AIC Code, by reference to the guidance notes provided by the
AIC Guide, and considers that reporting against these will provide
appropriate information to Shareholders. To ensure ongoing
compliance with these principles the Board reviews a report from
the Company Secretary identifying how the Company is in compliance
and identifying any changes that might be necessary.
The Company has complied with the recommendations of the AIC
Code throughout the accounting period, except as set out below.
The AIC Code includes provisions relating to:
-- the role of the chief executive;
-- executive directors' remuneration; and
-- the whistle-blowing policy.
The Board considers some of these provisions are not relevant to
the position of the Company as it is an externally managed
investment company. The Directors are non-executive and the Company
does not have employees and the Board is satisfied that any
relevant issues that arise can be properly considered by the Board
or by Shareholders at AGMs. The Remuneration Committee considers
matters relating to Directors' remuneration. An external assessment
of Directors' remuneration has not been undertaken. The Company's
Remuneration policy is that fees payable to the Directors should
reflect the experience and expertise of and the responsibilities
borne by the Directors and the time spent on the Company's affairs
and be sufficient to attract, retain and motivate Directors of a
quality required to run the Company successfully. Please refer to
the Remuneration Committee Report on pages 48-49.
The Board
The Directors' details are listed in the Directors' Report,
which set out their range of investment, financial and business
skills and experience.
The Board meets at least four times a year and, in addition,
there is regular contact between the Board, the Investment Manager
and the Company Secretary including an annual strategy meeting and
Investment Manager due diligence visits, when the Board attends the
offices of the Investment Manager and meets with senior executives.
Further, the Board requires that it is supplied in a timely manner
with information by the Investment Manager, the Company Secretary
and other advisers in a form and of a quality appropriate to enable
it to discharge its duties.
Duties and Responsibilities
The Board has overall responsibility for optimising the
Company's performance by directing and supervising the affairs of
the business and meeting the appropriate interests of Shareholders
and relevant stakeholders, while enhancing the value of the Company
and also ensuring the protection of investors. A summary of the
Board's responsibilities is as follows:
-- statutory obligations and public disclosure;
-- strategic matters and financial reporting;
-- risk assessment and management including reporting,
compliance, governance, monitoring and control; and
-- other matters having a material effect on the Company.
The Board is responsible to Shareholders for the overall
management of the Company.
The Board has delegated the day-to-day operation of the Company
to the Investment Manager, Administrator and the Company Secretary.
The Board reserves the powers of decisions relating to the
determination of the Investment Policy, the approval of changes in
strategy, capital structure, statutory obligations, public
disclosure and the entering into of any material contracts by the
Company.
The previous table is an extract of the various Directors'
attendance at Board and Committee meetings for the financial year
compared against those for which they were eligible to attend.
Additionally, five ad-hoc meetings and a further three informal
meetings were held during the year which, as they dealt primarily
with administrative and transaction matters, were attended by those
Directors available at the time.
Audit and Management
Scheduled Nomination Risk Engagement Remuneration
Board Committee Committee Committee Committee
Meetings Meeting Meeting Meeting Meeting
Attendance Attendance Attendance Attendance Attendance
----------------------- ----------- ----------- ----------- ----------- ------------
Attendance by:
----------------------- ----------- ----------- ----------- ----------- ------------
Bob Cowdell (Chairman) 4/4 1/1 3/3 1/1 1/1
----------------------- ----------- ----------- ----------- ----------- ------------
Susie Farnon 4/4 1/1 3/3 1/1 1/1
----------------------- ----------- ----------- ----------- ----------- ------------
John Hallam 4/4 1/1 3/3 1/1 1/1
----------------------- ----------- ----------- ----------- ----------- ------------
Colleen McHugh 4/4 1/1 3/3 1/1 1/1
----------------------- ----------- ----------- ----------- ----------- ------------
Chairman
The Chairman, Mr Cowdell, is responsible for leadership of the
Board, ensuring its effectiveness on all aspects of its role and
setting its agenda. The Chairman is also responsible for ensuring
that the Directors receive accurate, timely and clear information.
The Chairman is responsible for effective communication with
Shareholders and can be contacted through the Company
Secretary.
Senior Independent Director ("SID")
Mr Hallam is the SID and, as such, his primary roles are to
support the Chairman and act as an intermediary for the other
non-executive Directors in matters relating to the Chairman,
including leading them in the annual performance evaluation of the
Chairman. The SID is also available to Shareholders who may have
any concerns which contact through the normal channels of the
Chairman and AIFM has failed to resolve or for which such contact
is inappropriate. Mr Hallam can also be contacted through the
Company Secretary.
Board Independence
For the purposes of assessing compliance with the AIC Code's
Principles and Provisions, the Board considers whether the current
Directors are independent of the Investment Manager and free from
any business or other relationship that could materially interfere
with the exercise of their independent judgement. In making this
assessment, consideration is also given to all other factors which
might be relevant including length of service. The Board has
concluded that all Directors remain independent.
Committees of the Board
In accordance with the AIC Code, the Board has established an
Audit and Risk Committee, a Nomination Committee, a Management
Engagement Committee and a Remuneration Committee, in each case
with formally delegated duties and responsibilities within written
terms of reference.
Audit and Risk Committee
The Audit and Risk Committee is chaired by Mrs Farnon, and its
other members are Mr Cowdell, Mr Hallam and Mrs McHugh. The terms
of reference of the Audit and Risk Committee state that it will
meet not less than three times in each financial year. In the year
ended 31 March 2023, the Audit and Risk Committee met at one ad-hoc
meeting and four informal meetings. The Audit and Risk Committee
Report on pages 56-59 sets out the role and activities of this
Committee and its relationship with the external auditor.
Nomination Committee
The Nomination Committee is chaired by Mr Cowdell and its other
members are Mr Hallam, Mrs Farnon and Mrs McHugh. The members of
the Nomination Committee are and will be independent Directors. The
terms of reference state that the Nomination Committee will meet
not less than once a year; will have responsibility for considering
the size, structure and composition of the Board; retirements and
appointments of additional and replacement Directors; and that the
Nomination Committee will make appropriate recommendations to the
Board.
The Board appoints all Directors on merit. When the Nomination
Committee considers Board succession planning and recommends
appointments to the Board, it takes into account a variety of
factors. Knowledge, experience, skills, personal qualities,
residency and governance credentials play an important part. The
Board aims to have a balance of skills, experience, diversity
(including gender) and length of service and knowledge of the
industry. The Board undertakes an evaluation of its performance on
an annual basis. The performance of each Director is considered as
part of a formal review by the Nomination Committee.
The position of Chairman of each Committee will be reviewed on
an annual basis by the Nomination Committee and their membership
and terms of reference are kept under review.
The performance of the Chairman of the Board will be assessed by
the SID through appraisal questionnaires and discussions with the
other Directors.
Management Engagement Committee
The Management Engagement Committee is chaired by Mrs Farnon,
with its other members being Mr Hallam, Mr Cowdell and Mrs McHugh.
The Committee will meet at least once a year for the purpose of
evaluating the performance of the Company's service providers, the
review of service agreements and service level statements and the
level and method of their remuneration. It is proposed that Mrs
McHugh will succeed Mrs Farnon as chair of the Committee following
the Company's next AGM.
Remuneration Committee
The Remuneration Committee is chaired by Mr Hallam, with its
other members being Mr Cowdell, Mrs Farnon and Mrs McHugh. The
Committee will meet at least once a year for the purpose of
determining Directors' remuneration and setting the Company's
remuneration policy.
Director Re-Election Tenure and Induction
The Nomination Committee has considered the question of a policy
on Board tenure. It is strongly committed to striking the correct
balance between the benefits of continuity and those that come from
the introduction of new perspectives to the Board. As provided for
in the AIC guidelines and in order to phase future retirements and
appointments the Board has not, at this stage, adopted any specific
limits to terms, but expects to refresh the Board at appropriate
intervals.
The Board regards all Directors as being independent. The Board
has adopted a policy whereby all Directors will be proposed for
re-election each year and so all Directors will be proposed for
re-election at the forthcoming AGM. Details of Directors' tenure
are disclosed on pages 40-41.
Internal Controls
The Board has established a continuous process for identifying,
evaluating and managing the significant risks the Company faces.
The Board regularly reviews the process, which has been in place
from the start of the financial year to the date of approval of
this report. The Board is responsible for the Company's system of
internal control and for reviewing its effectiveness. Such a system
is designed to manage rather than eliminate the risk of failure to
achieve business objectives, and can only provide reasonable and
not absolute assurance against material misstatement or loss.
In compliance with the Principles and Provisions of the AIC
Code, the Board regularly reviews the effectiveness of the
Company's system of internal control. The Board's monitoring covers
all controls, including financial, operational and compliance
controls and risk management. It is based principally on reviewing
reports from the Investment Manager in order to consider whether
all significant risks are identified, evaluated, managed and
controlled and whether any significant weaknesses are promptly
remedied and indicate a need for more extensive monitoring. To this
end, a Risk Matrix is maintained, which identifies the significant
risks faced by the Company together with the controls intended to
manage them and is reviewed at each scheduled Board meeting. The
Board has also performed a specific assessment considering all
significant aspects of internal control arising during the year
covered by this report. The Audit and Risk Committee assists the
Board in discharging its review responsibilities.
During the course of its review of the system of internal
control, the Board has not identified nor been advised of any
failings or weaknesses which it has determined to be
significant.
While investment management is provided by Cheyne, the Board is
responsible for setting the overall Investment Policy and monitors
the actions of the Investment Manager at regular Board meetings.
Administration services are provided by Citco. Regular compliance
reports from both the Investment Manager and the Administrator are
received by the Board. In addition, the Administrator makes
available its Global Fund Accounting and Custody Controls
Examination, SOC 1 report to the Board on an annual basis.
Custody of assets is undertaken by the Depositary, The Bank of
New York Mellon (International) Limited.
The Investment Manager has established an internal control
framework and reviews the segregation of duties within this to
ensure that control functions are segregated from the trading and
investing functions. As a part of this framework, the valuation of
financial instruments is overseen by an internal pricing committee
which is supported by resources which ensure that it is able to
function at an appropriate level of quality and effectiveness.
Specifically, the Investment Manager's pricing committee is
responsible for establishing and monitoring compliance with
valuation policy. Within the trading and investing functions, the
Investment Manager has established policies and procedures that
relate to the approval of all new transactions, transaction pricing
sources and fair value hierarchy coding within the financial
reporting system.
The Directors of the Company clearly define the duties and
responsibilities of their agents and advisers, whose appointments
are made by the Board after due consideration. The Board monitors
the ongoing performance of such agents and advisers. Each agent and
adviser maintains its own systems of internal control on which it
reports to the Board. The systems are designed to ensure effective
and efficient operation, internal control and compliance with laws
and regulations. In establishing the systems of internal control,
regard is paid to the materiality of relevant risks, the likelihood
of costs being incurred and costs of control. It follows,
therefore, that the systems of internal control can only provide
reasonable but not absolute assurance against the risk of material
misstatement or loss.
The Board has reviewed the need for an internal audit function
and has decided that the systems and procedures employed by the
Administrator and Investment Manager, including their own internal
controls and procedures, provide sufficient assurance that a sound
system of risk management and internal control, which safeguards
Shareholders' investment and the Company's assets, is maintained.
An internal audit function specific to the Company is therefore
considered unnecessary.
Corporate Social Responsibility
The Board keeps under review developments involving social and
environmental issues, and will report on those to the extent they
are considered relevant to the Company's operations. The Company's
ESG strategy is outlined on page 30 of the Stakeholder Engagement
section and in the Sustainability Report on pages 32-36.
UK Criminal Finances Act 2017
In respect of the UK Criminal Finances Act 2017 which has
introduced a new Corporate Criminal Offence of "failing to take
reasonable steps to prevent the facilitation of tax evasion", the
Board confirms that it is committed to zero tolerance towards the
criminal facilitation of tax evasion.
General Data Protection Regulation ("GDPR")
The Board confirms that the Company has considered GDPR and
taken measures itself and with its service providers, to meet the
requirements of GDPR and equivalent Guernsey law.
Anti-Bribery and Corruption Policy
The Board has adopted a formal Anti-Bribery and Corruption
Policy. The policy applies to the Company and to each of its
Directors. Furthermore, the policy is shared with each of the
Company's main service providers.
Whistle-blowing
As the Company has no employees of its own, it does not have a
whistle-blowing policy but in its review of service providers the
Management Engagement Committee ensures that they do.
Employees and Socially Responsible Investment
The Company has a management contract with the Investment
Manager. It has no employees and all of its Directors are
non-executive, with day-to-day activities being carried out by
third parties. There are therefore no disclosures to be made in
respect of employees.
The Company's main activities are carried out by the Investment
Manager who was one of the initial signatories to the Standards
Board for Alternative Investments (formerly known as the Hedge Fund
Standards Board) and is a signatory to the United Nations-
supported Principles for Responsible Investment ("PRI").
Modern Slavery Act 2015
The Company as a Guernsey incorporated entity is not within
scope of the Modern Slavery Act 2015, and is therefore not obliged
to make a human trafficking statement.
Gender Metrics
The Company, in conjunction with the Investment Manager, strives
to achieve a diverse workforce that embraces individuals of all
gender, race, nationality, religion, age and orientation and to
develop a unique workplace to come together and grow professionally
and personally.
Cheyne is committed to supporting diversity, equality and
inclusion through implementing change and supporting initiatives,
partnerships and programmes across the firm and the industry, under
the oversight of Cheyne's DE&I Committee. Cheyne is comprised
of a diverse range of employees and is committed to providing equal
employment opportunities to all colleagues and applicants without
regard to gender, race, nationality, religion, age, orientation or
disability. To this end, Cheyne has implemented reporting tools
within its HR system to enable a more granular measurement of
gender and ethnicity, using the AIMA/Albourne classifications
within their DE&I Questionnaire, that is compliant with data
privacy considerations. The ongoing evolution and monitoring of
this data will allow the Investment Manager to assess how its
DE&I Policy and supporting action plans are working in
practice, while enabling the DE&I Committee to identify areas
for improvement and target its efforts to effect change. The
business case behind the data collection has been communicated to
all employees.
Principal Risks and Uncertainties
The Board has carried out a robust assessment to identify the
emerging and principal risks that could affect the Company,
including those that would threaten its business model, future
performance, solvency or liquidity. It has adopted a controls based
approach to its risk monitoring requiring each of the relevant
service providers, including the Investment Manager, to establish
the necessary controls to ensure that all known risks are monitored
and controlled in accordance with agreed procedures. The Directors
receive periodic updates at their Board meetings on key risks and
have adopted their own control review to ensure, where possible,
risks are monitored appropriately.
Each Director is aware of the principal risks and uncertainties
inherent in the Company's business and understands the importance
of identifying, evaluating and monitoring these risks. The Board
has adopted procedures and controls that enable it to manage these
principal risks and uncertainties within acceptable limits and to
meet all of its legal and regulatory obligations.
The Board considers the process for identifying, evaluating and
managing these principal risks and uncertainties faced by the
Company on an ongoing basis and these principal risks and
uncertainties are reported and discussed at Board meetings. It
ensures that effective controls are in place to mitigate these
risks and that a satisfactory compliance regime exists to ensure
all applicable local and international laws and regulations are
upheld.
The Company's principal risks are discussed in the Strategic
Report of these financial statements and in the Company's
Prospectus, available on the Company's website
(www.realestatecreditinvestments.com) while those specifically
relating to financial reporting are discussed in the Audit and Risk
Committee Report and Note 15 to the financial statements.
Changes in Regulation
The Board monitors and responds to changes in regulation as it
impacts the Company and its policies.
Audit and Risk Committee Report
Dear Shareholders,
On the following pages, we present the Audit and Risk
Committee's report for 2023, setting out the responsibilities of
the Audit and Risk Committee and its key activities during the year
ended 31 March 2023. As in previous years, the Audit and Risk
Committee has reviewed the Company's financial reporting, the
independence and effectiveness of the external auditor and the
internal control and risk management systems of the Company's
service providers. In order to assist the Audit and Risk Committee
in discharging these responsibilities, regular reports are received
and reviewed from the Investment Manager, Administrator and
external auditor.
A member of the Audit and Risk Committee will be available at
each AGM to respond to any Shareholder questions on the activities
of the Audit and Risk Committee.
Susie Farnon
Chairman of the Audit and Risk Committee
Membership of the Audit and Risk Committee
The Audit and Risk Committee is chaired by Mrs Farnon, and its
other members are Mr Cowdell, Mr Hallam and Mrs McHugh. The FRC
Guidance on Audit and Risk Committees recommends that such a
committee should comprise solely of independent non-executive
directors and, as noted in the Corporate Governance Statement, the
Board has considered the independence of its members and has
concluded that they all remain independent. The Company Chairman
currently serves as a member of the Audit and Risk Committee. The
terms of reference state that the Audit and Risk Committee will
meet not less than three times in the year and meet the external
auditor twice a year, on which occasions the need to meet without
representatives of either the Investment Manager or the
Administrator being present is considered. The terms of reference
include all matters indicated in the Disclosure and Transparency
Rule 7.1 and the AIC Code.
The Board has taken note of the requirement that at least one
member of the Committee should have recent and relevant financial
experience and is satisfied that the Committee is properly
constituted in that respect with all members being highly
experienced and Mrs Farnon and Mr Hallam being chartered
accountants who also sit or have sat on other audit committees.
Responsibilities
The Audit and Risk Committee has regard to the AIC Code and
examines the effectiveness of the Company's internal control
systems, the integrity of the annual and half-yearly reports and
financial statements and ensures that they are fair, balanced and
understandable and provide the necessary information. It also
considers the auditor's remuneration and engagement, as well as the
auditor's independence and any non-audit services provided by them.
Other areas of responsibility include:
-- Consideration of the fair value of the Company's investments
and income generated from the portfolio;
-- Consideration of the accounting policies of the Company;
-- Meeting with the external auditor to discuss the proposed audit plan and reporting;
-- Assess the effectiveness of the external auditor and audit process;
-- Consideration of the need for an internal audit function;
-- Review of any independent reports in respect of the
Investment Manager, the Administrator or the Depositary;
-- Consideration of the risks facing the Company including the
Company's anti-bribery, corruption and similar obligations; and
-- Monitoring the Company's procedures for ensuring compliance
with statutory regulations and other reporting requirements.
In addressing all of the above considerations, the Audit and
Risk Committee seeks the appropriate input from the external
auditor, Investment Manager, Administrator, Company Secretary and
Legal Counsel and makes a recommendation to the Board of the
Company as appropriate.
Meetings
The Audit and Risk Committee normally meets at least three times
annually, including shortly before the Board meets to consider the
Company's half-yearly and annual financial reports, and reports to
the Board on its deliberations and recommendations. It also has an
annual planning meeting with the auditor and other ad-hoc meetings
as considered necessary.
The Audit and Risk Committee operates within clearly defined
terms of reference and provides a forum through which the Company's
external auditor reports to the Board. The terms of reference of
the Audit and Risk Committee are available from the Company's
registered office. The Audit and Risk Committee receives
information from the Company's service providers with the majority
of information being directly sourced from the Company Secretary,
Administrator, the Investment Manager and the external auditor. The
Audit and Risk Committee considers the nature, scope and results of
the auditor's work and reviews their performance annually prior to
providing a recommendation to the Board on the reappointment or
removal of the auditor.
Significant Issues Considered over Financial Reporting
The Audit and Risk Committee has determined that the key risks
of misstatement of the Company's financial statements relate to the
judgements in respect of the fair value of the Company's portfolio
and income recognition.
Additional information regarding principal risks and
uncertainties is provided in the Strategic Report and in Note 15 to
the financial statements.
The Board considers a report from the Investment Manager at each
Board meeting which sets out a review of the portfolio and its
performance. The report also details earnings forecasts and asset
class analysis. As a result, the Board is able to interrogate the
Investment Manager on the basis of the assumptions made and the
validity of the expected forecasts.
Valuation of Portfolios
The Audit and Risk Committee conducted a detailed review of each
bilateral loan and bond position through discussions with the
AIFM's relevant individual asset managers challenging them as
appropriate. Such discussions covered aspects such as:
-- Available and recent professional valuations of the underlying collateral;
-- Credit quality of the individual borrower;
-- Quality of the underlying collateral;
-- Operational and financial performance of the borrower;
-- Status of development schedules compared to original plans;
-- Planning or other disputes;
-- Comparison between effective and actual yields; and
-- Whether or not any value should be ascribed to contingent
fees and potential profit participations provided for in
contractual arrangements.
When considering the bilateral bond investments, the Audit and
Risk Committee considered a number of factors including, but not
restricted to:
-- The key valuation judgement whereby the effective interest
rate calculated when the loan or bond was issued is used as proxy
for the market yield at the valuation date;
-- Pricing sources;
-- The valuation approach used to value certain bonds by the
independent pricing adviser and challenging the AIFM's assessment
of the comparable securities and sector analysis used in
determining the valuation of these bonds;
-- The range of valuations determined by the independent pricing
adviser in light of the approaches used and the weighting applied
by the Investment Manager to derive a fair value point
estimate;
-- Comparison between effective and actual yields;
-- Depth of prices and any disparity between different marks;
-- Indicative liquidity;
-- Comparison of realised prices with previous valuations; and
-- The significance of unobservable inputs used to determine the
fair value of the bond investments and classification within the
fair value hierarchy.
Having conducted this process the Audit and Risk Committee
concluded that any assumptions used were reasonable and that the
valuations were in accordance with the applicable standards.
During the year, the Chairman of the Audit and Risk Committee
and/or other members of the Board attended at least two of the
meetings held between the auditor and the Investment Manager in
respect of valuations.
Income Recognition
The Audit and Risk Committee and the Board as a whole considered
and challenged the Investment Manager's expected realisation or
maturity dates and the resultant expected cash flows. The Committee
found that the assumptions used were reasonable and that whilst it
is possible that the expected realisation dates may change over
time the Committee and the Board are satisfied that the assumed
realisation dates and the Investment Manager's methods of
calculating income are reasonable and in line with International
Financial Reporting Standards ("IFRS").
As highlighted in the long-term viability section in the
Strategic Report, the Investment Manager performed an evaluation of
each of its positions, taking into account all relevant
geopolitical and macro economic risks, on its operating models and
valuations. A detailed cash flow profile of each investment was
completed, incorporating the probability of likely delays to
repayments, other stress tests (and additional cash needs); these
were taken into account in the modelled expected cash flows for 31
March 2023.
Risk Management
The Company's risk assessment process and the way in which
significant business risks are managed is a key area of focus for
the Committee. The work of the Audit and Risk Committee is driven
primarily by the Company's assessment of its principal risks and
uncertainties as set out in the Strategic Report and in Note 15 to
the financial statements, and it receives reports from the
Investment Manager on the Company's risk evaluation process and
reviews changes to significant risks identified.
Internal Audit
The Committee considers at least once a year whether or not
there is a need for an internal audit function. Currently, the
Committee believes that, given the Company has no employees, the
SOC 1 internal control report provided by the Administrator and the
reporting provided by the Investment Manager are sufficient and has
made a recommendation to the Board to this effect.
External Audit
Deloitte LLP has been the Company's external auditor since the
Company's inception.
The objectivity of the auditor is reviewed by the Committee
which also reviews the terms under which the external auditor may
be appointed to perform non-audit services. Auditor independence is
maintained through limiting non-audit services to audit-related
work that falls within defined categories. All engagements with the
auditor are subject to pre-approval from the Audit and Risk
Committee and fully disclosed within the Annual Report for the
relevant period. A new lead audit partner is appointed every five
years and the Audit and Risk Committee ensures the auditor has
appropriate internal mechanisms in place to ensure its
independence.
When evaluating the external auditor, the Committee has regard
to a variety of criteria including industry experience,
independence, reasonableness of audit plan, ability to deliver
constructive criticism, effectiveness of communication with the
Board and the Company's service providers, quality control
procedures, management of audit process, price and added value
beyond assurance in audit opinion.
In order to maintain auditor independence, Deloitte LLP ensured
the following safeguards were in place:
-- review and challenge of key decisions by the Quality Review
Partner and engagement quality control review by a member of the
Independent Professional Standard Review Team.
John Clacy replaced David Becker as audit partner from the year
ended 31 March 2021. He also served as the audit partner for the
years ended 31 March 2011 to 31 March 2015. The Audit and Risk
Committee has considered this in light of guidance and the changes
to the business since this time and, as such, they are satisfied
that his independence is not impaired.
The Committee reviews the scope and results of the audit, its
cost effectiveness and the independence and objectivity of the
auditor, with particular regard to the level of non-audit fees.
During the year, Deloitte charged non-audit fees of GBP39,500 for
the 30 September 2022 interim review.
Notwithstanding the provisions of such services, the Audit and
Risk Committee considers Deloitte LLP to be independent of the
Company and that the provision of such non-audit services is not a
threat to the objectivity and independence of the conduct of the
audit as appropriate safeguards are in place.
To fulfil its responsibility regarding the independence of the
auditor, the Audit and Risk Committee considers:
-- discussions with or reports from the auditor describing its
arrangements to identify, report and manage any conflicts of
interests in light of the requirements of the Crown Dependencies'
Audit Rules and Guidance; and
-- the extent of non-audit services provided by the auditor and
arrangements for ensuring the independence, objectivity and
robustness and perceptiveness of the auditor and their handling of
key accounting and audit judgements.
To assess the effectiveness of the auditor and the audit
process, the Committee reviews:
-- the auditor's fulfilment of the agreed audit plan and variations from it;
-- discussions or reports highlighting the major issues that
arose during the course of the audit;
-- feedback from other service providers evaluating the performance of the audit team;
-- arrangements for ensuring independence and objectivity; and
-- robustness of the auditor in handling key accounting and audit judgements.
The Audit and Risk Committee was satisfied with the audit
process and Deloitte LLP's effectiveness and independence as an
Auditor, having considered the degree of diligence and professional
scepticism demonstrated by them.
During the year ended 31 March 2023, the auditor had three
meetings with the Audit and Risk Committee and met with the
Chairman of the Audit and Risk Committee on other occasions when
necessary.
On behalf of the Audit and Risk Committee.
Susie Farnon
Chairman of the Audit and Risk Committee
21 June 2023
Directors' Responsibility
Statement
The Directors are responsible for preparing the Annual Report
and the financial statements in accordance with applicable law and
regulations.
The Companies (Guernsey) Law, 2008 requires the Directors to
prepare financial statements for each financial year. Under that
law, the Directors have elected to prepare the Company financial
statements in accordance with IFRS. Under company law, the
Directors must not approve the accounts unless they are satisfied
that they give a true and fair view of the state of affairs of the
Company and of the profit or loss of the Company for that year. In
preparing these financial statements, International Accounting
Standard 1 ("IAS 1") requires that Directors:
-- properly select and apply accounting policies;
-- present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information;
-- provide additional disclosures when compliance with the
specific requirements in IFRS are insufficient to enable users to
understand the impact of particular transactions, other events and
conditions on the entity's financial position and financial
performance; and
-- make an assessment of the Company's ability to continue as a going concern.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company's
transactions and disclose with reasonable accuracy at any time the
financial position of the Company and enable them to ensure that
the financial statements comply with the Companies (Guernsey) Law,
2008. They are also responsible for safeguarding the assets of the
Company and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company's website. Legislation in Guernsey governing the
preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
We confirm that to the best of our knowledge:
(i) The financial statements, prepared in accordance with IFRS,
give a true and fair view of the assets, liabilities, financial
position and profit or loss of the Company;
(ii) The Chairman's Statement, the Strategic Report and the
Investment Manager's Report include a fair review of the
development and performance of the business and the position of the
Company together with a description of the principal risks and
uncertainties they face; and
(iii) So far as each Director is aware, there is no relevant
audit information of which the Company's auditor is unaware, and
each Director has taken all the steps that he/she ought to have
taken as a Director in order to make himself/herself aware of any
relevant audit information and to establish that the Company's
auditor is aware of that information. This confirmation is given
and should be interpreted in accordance with the provisions of
section 249 of the Companies (Guernsey) Law, 2008 (as amended).
Responsibility Statement of the Directors in Respect of the
Annual Report under the UK Corporate Governance Code
The Directors are responsible for preparing the Annual Report in
accordance with applicable law and regulations. Having taken advice
from the Audit and Risk Committee, the Directors consider the
Annual Report and financial statements, taken as a whole, as fair,
balanced and understandable and that it provides the information
necessary for Shareholders to assess the Company's performance,
business model and strategy.
By order of the Board.
Bob Cowdell Susie Farnon
Director Director
21 June 2023
Annual Report and Accounts 2023
Financial
Statements
In this section
Independent Auditor's Report
---------------------------------------
Statement of Comprehensive Income
---------------------------------------
Statement of Financial Position
---------------------------------------
Statement of Changes in Equity
---------------------------------------
Statement of Cash Flows
---------------------------------------
Notes to the Financial Statements
---------------------------------------
Appendix I - AIFM Remuneration Policy
(Unaudited)
---------------------------------------
Appendix II - AIFM Leverage (Unaudited)
---------------------------------------
Glossary
---------------------------------------
Directors and Advisers
---------------------------------------
Independent Auditor's Report to the Members of Real Estate
Credit Investments Limited
Report on the audit of the financial statements
1. Opinion
In our opinion the financial statements of Real Estate Credit
Investments Limited (the 'Company'):
-- give a true and fair view of the state of the Company's
affairs as at 31 March 2023 and of its profit for the year then
ended;
-- have been properly prepared in accordance with International
Financial Reporting Standards (IFRSs) as issued by the
International Accounting Standards Board (IASB); and
-- have been prepared in accordance with the requirements of the
Companies (Guernsey) Law, 2008.
We have audited the financial statements which comprise:
-- the statement of comprehensive income;
-- the statement of financial position;
-- the statement of changes in equity;
-- the statement of cash flows; and
-- the related notes 1 to 22.
The financial reporting framework that has been applied in their
preparation is applicable law and IFRSs as issued by the IASB.
2. Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities under those standards are further described in the
auditor's responsibilities for the audit of the financial
statements section of our report.
We are independent of the Company in accordance with the ethical
requirements that are relevant to our audit of the financial
statements in the UK, including the Financial Reporting Council's
(the 'FRC's') Ethical Standard as applied to listed public interest
entities, and we have fulfilled our other ethical responsibilities
in accordance with these requirements. The non-audit services
provided to the Company for the year are disclosed in note 5 to the
financial statements. We confirm that we have not provided any
non-audit services prohibited by the FRC's Ethical Standard to the
Company.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
3. Summary of our audit approach
Key audit matters
The key audit matter that we identified in the current year
was:
-- Key Judgement in the valuation of bilateral loan and bond portfolio
Within this report, key audit matters are identified as
follows:
-- Newly identified
-- Increased level of risk
-- Similar level of risk
-- Decreased level of risk
Materiality
The materiality that we used in the current year was GBP6.7
million which was determined on the basis of approximately 2% of
net assets of the Company.
Scoping
Audit work to respond to the risks of material misstatement was
performed directly by the audit engagement team.
Significant changes in our approach
There have been no significant changes in our audit
approach.
In the current year audit, our key audit matter regarding the
valuation of bilateral loan and bond portfolio relates specifically
to the judgement used by management that the initial effective
yield of investments remains suitable to be used as a discount rate
in the current market environment.
4. Conclusions relating to going concern
In auditing the financial statements, we have concluded that the
Directors' use of the going concern basis of accounting in the
preparation of the financial statements is appropriate.
Our evaluation of the Directors' assessment of the Company's
ability to continue to adopt the going concern basis of accounting
included:
-- Evaluating management's going concern paper, identifying the
assumptions applied in the going concern assessment particularly
the considerations of the current macroeconomic challenges and
testing the mechanical accuracy of the underlying forecasts;
-- Performing reverse stress testing on the key assumptions
applied to understand those that could potentially give rise to a
material uncertainty in respect of the use of the going concern
basis;
-- Checking consistency of the forecast assumptions applied in
the going concern assessment with other forecasts, including asset
maturity and valuation assumptions; and
-- Assessing the liquidity position of the Company including its
ability to meet its undrawn commitments by evaluating the impact of
repayment of the Company's financing agreements at maturity without
renewal, and considered the mitigating actions identified by the
Directors as available responses to liquidity risks.
Based on the work we have performed, we have not identified any
material uncertainties relating to events or conditions that,
individually or collectively, may cast significant doubt on the
Company's ability to continue as a going concern for a period of at
least twelve months from when the financial statements are
authorised for issue.
In relation to the reporting on how the Company has applied the
UK Corporate Governance Code, we have nothing material to add or
draw attention to in relation to the Directors' statement in the
financial statements about whether the Directors considered it
appropriate to adopt the going concern basis of accounting.
Our responsibilities and the responsibilities of the Directors
with respect to going concern are described in the relevant
sections of this report.
5. Key audit matters
Key audit matters are those matters that, in our professional
judgement, were of most significance in our audit of the financial
statements of the current period and include the most significant
assessed risks of material misstatement (whether or not due to
fraud) that we identified. These matters included those which had
the greatest effect on: the overall audit strategy, the allocation
of resources in the audit; and directing the efforts of the
engagement team.
These matters were addressed in the context of our audit of the
financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these
matters.
5.1. Key Judgement in the valuation of bilateral loan and bond portfolio
Key audit matter The bilateral loan and bond investments of GBP351.5 million
description (2022: GBP295.9 million) make up 84% (2022: 66%) of total
assets and are a key value driver for the Company's Net
Asset Value (NAV).
As the Company's investments are measured at fair value,
the discount rate that should be used to calculate the
present value of future cash flows should be the market
yield prevailing at the valuation date.
Management has made a judgement that for these instruments
that are highly bespoke and are not adequately comparable
to other market positions, the initial effective yield
of investment is considered an appropriate representative
of the current market yield at the valuation date. This
is the key judgement made by management in the valuation
of the investment portfolio.
This has contributed to a risk of fraud and error associated
with the valuation approach applied particularly around
the fixed income investments. This has become of more
importance as a result of the changes in the macroeconomic
environment and the movement in market yield during the
year.
This judgement is described as one of the key sources
of estimation uncertainty in note 3 and 15 to the financial
statements. This is further described in the Audit and
Risk Committee Report on pages 56-59.
How the scope To respond to the key audit matter, we have performed
of our audit the following audit procedures:
responded to * Obtained an understanding of, and tested the
the key audit operating effectiveness of the controls around the
matter valuation process.
* Challenged management's use of bond or loan's initial
effective yield as a representative of market yield
by performing management enquiries and assessing the
assumptions used.
* Analysed the bilateral loans and bonds investment
portfolio by comparing the yield of each fixed
interest rate loan or bond with the relevant range of
market yields at the valuation date using independent
expert third-party data.
* Analysed the yields implicit in loans and bonds
issued during the year and compared with the yields
of more seasoned loans to evaluate management's
assertion that the yield of the Company's assets is
dislocated from the movement in market yields.
* Searched for contradictory evidence by verifying a
number of data points including the realisation of
loans and bonds during the year and the pricing of
bonds and loans valued using market comparables.
* Assessed the financial statements related disclosures
to evaluate whether they appropriately explain
judgements made by management, including the
associated assumptions, and highlight the sensitivity
to changes in those assumptions.
Key observations We concluded that the judgement applied by management,
in arriving at the fair value of the Company's self-originated
bonds and loans investments, was reasonable, and that
the resulting valuations are not materially misstated.
We also concluded that the related disclosures are appropriate.
6. Our application of materiality
6.1. Materiality
We define materiality as the magnitude of misstatement in the
financial statements that makes it probable that the economic
decisions of a reasonably knowledgeable person would be changed or
influenced. We use materiality both in planning the scope of our
audit work and in evaluating the results of our work.
Based on our professional judgement, we determined materiality
for the financial statements as a whole as follows:
Materiality GBP6.7 million (2022: GBP6.9 million)
--------------------------------- --------------------------------------------------------
Basis for determining materiality 2% (2022: 2%) of the Net Asset Value as at
31 March
--------------------------------- --------------------------------------------------------
Rationale for the benchmark Net Asset Value is the most appropriate benchmark
applied as it is considered one of the principal considerations
for members of the Company in assessing financial
performance and represents total Shareholders'
interest.
--------------------------------- --------------------------------------------------------
6.2. Performance materiality
We set performance materiality at a level lower than materiality
to reduce the probability that, in aggregate, uncorrected and
undetected misstatements exceed the materiality for the financial
statements as a whole. Performance materiality was set at 70% of
materiality for the 2023 audit (2022: 70%). In determining
performance materiality, we considered the following factors:
-- our risk assessment, including our assessment of the
Company's overall control environment, including that of the
administrator; and
-- our past experience of the audit, which has indicated a low
number of corrected and uncorrected misstatements identified
in prior periods.
6.3. Error reporting threshold
We agreed with the Audit Committee that we would report to the
Committee all audit differences in excess of GBP336,000 (2022:
GBP343,000), as well as differences below that threshold that, in
our view, warranted reporting on qualitative grounds. We also
report to the Audit Committee on disclosure matters that we
identified when assessing the overall presentation of the financial
statements.
7. An overview of the scope of our audit
7.1. Scoping
Our audit was scoped by obtaining an understanding of the
Company and its environment, including internal control, and
assessing the risks of material misstatement. Audit work to respond
to the risks of material misstatement was performed directly by the
audit engagement team.
7.2. Our consideration of the control environment
The accounting function for the Company is provided by a
third-party administrator. In performing our audit, we obtained an
understanding of relevant controls at the administrator that are
relevant to the business processes of the Company. We have obtained
an understanding of and tested the operating effectiveness of the
control procedures at the investment manager level around the key
valuation judgement used in the valuation but we have not followed
a control reliance approach.
7.3. Our consideration of climate-related risks
In planning our audit, we have considered the potential impact
of climate change on the Company's business and its financial
statements.
The Company continues to develop its assessment of the potential
impacts of environmental, social and governance ("ESG") related
risks, including climate change, as outlined on page 32.
We performed our own qualitative risk assessment of the
potential impact of climate change on the Company's account
balances and classes of transactions.
We have also read the annual report to consider whether they are
materially consistent with the financial statements and our
knowledge obtained in the audit.
8. Other information
The other information comprises the information included in the
annual report, other than the financial statements and our
auditor's report thereon. The Directors are responsible for the
other information contained within the annual report.
Our opinion on the financial statements does not cover the other
information and we do not express any form of assurance conclusion
thereon.
Our responsibility is to read the other information and, in
doing so, consider whether the other information is materially
inconsistent with the financial statements or our knowledge
obtained in the course of the audit, or otherwise appears to be
materially misstated.
If we identify such material inconsistencies or apparent
material misstatements, we are required to determine whether this
gives rise to a material misstatement in the financial statements
themselves. If, based on the work we have performed, we conclude
that there is a material misstatement of this other information, we
are required to report that fact.
We have nothing to report in this regard.
9. Responsibilities of Directors
As explained more fully in the Directors' responsibility
statement, the Directors are responsible for the preparation of the
financial statements and for being satisfied that they give a true
and fair view, and for such internal control as the Directors
determine is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to
fraud or error.
In preparing the financial statements, the Directors are
responsible for assessing the Company's ability to continue as a
going concern, disclosing as applicable, matters related to going
concern and using the going concern basis of accounting unless the
Directors either intend to liquidate the Company or to cease
operations, or have no realistic alternative but to do so.
10. Auditor's responsibilities for the audit of the financial
statements
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an
auditor's report that includes our opinion. Reasonable assurance is
a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a
material misstatement when it exists. Misstatements can arise from
fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial
statements.
A further description of our responsibilities for the audit of
the financial statements is located on the FRC's website at:
www.frc.org.uk/auditorsresponsibilities. This description forms
part of our auditor's report.
11. Extent to which the audit was considered capable of
detecting irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance
with laws and regulations. We design procedures in line with our
responsibilities, outlined above, to detect material misstatements
in respect of irregularities, including fraud. The extent to which
our procedures are capable of detecting irregularities, including
fraud is detailed below.
11.1. Identifying and assessing potential risks related to
irregularities
In identifying and assessing risks of material misstatement in
respect of irregularities, including fraud and non-compliance with
laws and regulations, we considered the following:
-- the nature of the industry and sector, control environment
and business performance including the design of the Company's
remuneration policies, key drivers for the investment manager and
Directors' remuneration, and performance targets;
-- the Company's own assessment of the risks that irregularities
may occur either as a result of fraud or error that was last
approved by the Board on 13 June 2023;
-- results of our enquiries of management and the Audit
Committee about their own identification and assessment of the
risks of irregularities;
-- any matters we identified having obtained and reviewed the
Company's documentation of their policies and procedures relating
to:
- identifying, evaluating and complying with laws and
regulations and whether they were aware of any instances of
non-compliance;
- detecting and responding to the risks of fraud and whether
they have knowledge of any actual, suspected or alleged fraud;
- the internal controls established to mitigate risks of fraud
or non-compliance with laws and regulations;
-- the matters discussed among the audit engagement team and
relevant internal specialists, including tax, valuations and
industry specialists regarding how and where fraud might occur in
the financial statements and any potential indicators of fraud.
As a result of these procedures, we considered the opportunities
and incentives that may exist within the organisation for fraud and
identified the greatest potential for fraud in the following
area:
-- Key Judgement in the valuation of bilateral loan and bond portfolio
In common with all audits under ISAs (UK), we are also required
to perform specific procedures to respond to the risk of management
override.
We also obtained an understanding of the legal and regulatory
frameworks that the Company operates in, focusing on provisions of
those laws and regulations that had a direct effect on the
determination of material amounts and disclosures in the financial
statements. The key laws and regulations we considered in this
context included the Companies (Guernsey) Law, 2008, the Listing
Rules and relevant tax legislation.
In addition, we considered provisions of other laws and
regulations that do not have a direct effect on the financial
statements but compliance with which may be fundamental to the
Company's ability to operate or to avoid a material penalty. These
included the Company's regulatory licences under The Protection of
Investors (Bailiwick of Guernsey) Law, 2020.
11.2. Audit response to risks identified
As a result of performing the above, we identified key judgement
in the valuation of bilateral loan and bond portfolio as a key
audit matter related to the potential risk of fraud. The key audit
matters section of our report explains the matter in more detail
and also describes the specific procedures we performed in response
to that key audit matter.
In addition to the above, our procedures to respond to risks
identified included the following:
-- reviewing the financial statement disclosures and testing to
supporting documentation to assess compliance with provisions of
relevant laws and regulations described as having a direct effect
on the financial statements;
-- enquiring of management and the Audit Committee concerning
actual and potential litigation and claims;
-- performing analytical procedures to identify any unusual or
unexpected relationships that may indicate risks of material
misstatement due to fraud;
-- reading minutes of meetings of those charged with governance,
reviewing internal audit reports and reviewing correspondence with
the Guernsey Financial Services Commission; and
-- in addressing the risk of fraud through management override
of controls, testing the appropriateness of journal entries and
other adjustments; assessing whether the judgements made in making
accounting estimates are indicative of a potential bias; and
evaluating the business rationale of any significant transactions
that are unusual or outside the normal course of business.
We also communicated relevant identified laws and regulations
and potential fraud risks to all engagement team members including
internal specialists, and remained alert to any indications of
fraud or non-compliance with laws and regulations throughout the
audit.
Report on other legal and regulatory requirements
12. Corporate Governance Statement
The Listing Rules require us to review the directors' statement
in relation to going concern, longer-term viability and that part
of the Corporate Governance Statement relating to the Company's
compliance with the provisions of the UK Corporate Governance Code
specified for our review.
Based on the work undertaken as part of our audit, we have
concluded that each of the following elements of the Corporate
Governance Statement is materially consistent with the financial
statements and our knowledge obtained during the audit:
-- the Directors' statement with regards to the appropriateness
of adopting the going concern basis of accounting and any material
uncertainties identified set out on page 46;
-- the Directors' explanation as to its assessment of the
Company's prospects, the period this assessment covers and why the
period is appropriate set out on page 17;
-- the Directors' statement on fair, balanced and understandable set out on page 60;
-- the Board's confirmation that it has carried out a robust
assessment of the emerging and principal risks set out on page
54;
-- the section of the annual report that describes the review of
effectiveness of risk management and internal control systems set
out on pages 52-53; and
-- the section describing the work of the Audit Committee set out on pages 56-59.
13. Matters on which we are required to report by exception
13.1. Adequacy of explanations received and accounting
records
Under the Companies (Guernsey) Law, 2008 we are required to
report to you if, in our opinion:
-- we have not received all the information and explanations we require for our audit; or
-- proper accounting records have not been kept; or
-- the financial statements are not in agreement with the accounting records.
We have nothing to report in respect of these matters.
14. Other matters which we are required to address
14.1. Auditor tenure
Following the recommendation of the Audit Committee as a result
of the most recent tender process, we were appointed by the Board
of Directors on 13 June 2018 to audit the financial statements for
the year ending 31 March 2019 and subsequent financial periods. The
period of total uninterrupted engagement including previous
renewals and reappointments of the firm is 18 years, covering the
years ending 31 March 2006 to 31 March 2023.
14.2. Consistency of the audit report with the additional report
to the Audit Committee
Our audit opinion is consistent with the additional report to
the Audit Committee we are required to provide in accordance with
ISAs (UK).
15. Use of our report
This report is made solely to the Company's members, as a body,
in accordance with Section 262 of the Companies (Guernsey) Law,
2008. Our audit work has been undertaken so that we might state to
the Company's members those matters we are required to state to
them in an auditor's report and for no other purpose. To the
fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company and the Company's
members as a body, for our audit work, for this report, or for the
opinions we have formed.
As required by the Financial Conduct Authority (FCA) Disclosure
Guidance and Transparency Rule (DTR) 4.1.14R, these financial
statements will form part of the European Single Electronic Format
(ESEF) prepared Annual Financial Report filed on the National
Storage Mechanism of the UK FCA in accordance with the ESEF
Regulatory Technical Standard ('ESEF RTS'). This auditor's report
provides no assurance over whether the annual financial report has
been prepared using the single electronic format specified in the
ESEF RTS.
John Clacy, FCA
For and on behalf of Deloitte LLP
Recognised Auditor
St Peter Port, Guernsey
21 June 2023
Statement of Comprehensive Income
For the year ended 31 March 2023
31 Mar 2023 31 Mar 2022
Note GBP GBP
---------------------------------------------------- ---- ----------- -----------
Interest income 6 31,922,543 26,981,790
---------------------------------------------------- ---- ----------- -----------
Net (loss)/gain on financial assets and liabilities
at fair value through profit or loss 4 (1,264,149) 5,351,474
---------------------------------------------------- ---- ----------- -----------
Other income 7,940 37,017
---------------------------------------------------- ---- ----------- -----------
Operating income 30,666,334 32,370,281
---------------------------------------------------- ---- ----------- -----------
Operating expenses 5 (6,143,662) (5,841,351)
---------------------------------------------------- ---- ----------- -----------
Profit before finance costs 24,522,672 26,528,930
---------------------------------------------------- ---- ----------- -----------
Finance costs 6 (3,972,353) (1,954,553)
---------------------------------------------------- ---- ----------- -----------
Net profit 20,550,319 24,574,377
---------------------------------------------------- ---- ----------- -----------
Other comprehensive income - -
---------------------------------------------------- ---- ----------- -----------
Total comprehensive income 20,550,319 24,574,377
---------------------------------------------------- ---- ----------- -----------
Earnings per share
---------------------------------------------------- ---- ----------- -----------
Basic and diluted 8 9.0p 10.7p
---------------------------------------------------- ---- ----------- -----------
Weighted average shares outstanding Number Number
---------------------------------------------------- ---- ----------- -----------
Basic and diluted 8 229,332,478 229,332,478
---------------------------------------------------- ---- ----------- -----------
All items in the above statement are derived from continuing
operations.
The accompanying notes form an integral part of the financial
statements.
Statement of Financial Position
As at 31 March 2023
31 Mar 2023 31 Mar 2022
Note(s) GBP GBP
---------------------------------------------- ------- ----------- -----------
Non-current assets
---------------------------------------------- ------- ----------- -----------
Financial assets at fair value through profit
or loss 9,15 400,741,910 394,341,104
---------------------------------------------- ------- ----------- -----------
400,741,910 394,341,104
---------------------------------------------- ------- ----------- -----------
Current assets
---------------------------------------------- ------- ----------- -----------
Cash and cash equivalents 9 14,081,343 47,385,138
---------------------------------------------- ------- ----------- -----------
Cash collateral at broker 9,17 2,383,962 5,204,692
---------------------------------------------- ------- ----------- -----------
Derivative financial assets 9,10 1,756,118 -
---------------------------------------------- ------- ----------- -----------
Other assets 9 27,345 22,708
---------------------------------------------- ------- ----------- -----------
18,248,768 52,612,538
---------------------------------------------- ------- ----------- -----------
Total assets 418,990,678 446,953,642
---------------------------------------------- ------- ----------- -----------
Equity and liabilities
---------------------------------------------- ------- ----------- -----------
Equity
---------------------------------------------- ------- ----------- -----------
Reserves 336,965,907 343,935,484
---------------------------------------------- ------- ----------- -----------
336,965,907 343,935,484
---------------------------------------------- ------- ----------- -----------
Current liabilities
---------------------------------------------- ------- ----------- -----------
Financing agreements 9,13 80,154,134 100,368,732
---------------------------------------------- ------- ----------- -----------
Derivative financial liabilities 9,10 - 1,072,792
---------------------------------------------- ------- ----------- -----------
Other liabilities 9,11 1,870,637 1,576,634
---------------------------------------------- ------- ----------- -----------
82,024,771 103,018,158
---------------------------------------------- ------- ----------- -----------
Total liabilities 82,024,771 103,018,158
---------------------------------------------- ------- ----------- -----------
Total equity and liabilities 418,990,678 446,953,642
---------------------------------------------- ------- ----------- -----------
Shares outstanding 14 229,332,478 229,332,478
---------------------------------------------- ------- ----------- -----------
Net asset value per share GBP1.47 GBP1.50
---------------------------------------------- ------- ----------- -----------
The accompanying notes form an integral part of the financial
statements.
Signed on behalf of the Board of Directors by:
Bob Cowdell Susie Farnon
Director Director
21 June 2023
Statement of Changes in Equity
For the year ended 31 March 2023
31 Mar
2023
Note GBP
---------------------------- ---- ------------
Balance as at 31 March 2022 343,935,484
---------------------------- ---- ------------
Total comprehensive income 20,550,319
---------------------------- ---- ------------
Dividends 7 (27,519,896)
---------------------------- ---- ------------
Balance as at 31 March 2023 336,965,907
---------------------------- ---- ------------
31 Mar
2022
Note GBP
---------------------------- ---- ------------
Balance as at 31 March 2021 346,881,003
---------------------------- ---- ------------
Total comprehensive income 24,574,377
---------------------------- ---- ------------
Dividends 7 (27,519,896)
---------------------------- ---- ------------
Balance as at 31 March 2022 343,935,484
---------------------------- ---- ------------
The accompanying notes form an integral part of the financial
statements.
Statement of Cash Flows
For the year ended 31 March 2023
31 Mar 2023 31 Mar 2022
Note GBP GBP
-------------------------------------------------------- ---- ------------- -------------
Net profit 20,550,319 24,574,377
-------------------------------------------------------- ---- ------------- -------------
Purchases of investment portfolio (158,644,471) (258,415,073)
-------------------------------------------------------- ---- ------------- -------------
Repayments of investment portfolio 158,975,081 269,398,579
-------------------------------------------------------- ---- ------------- -------------
Movement in realised and unrealised gains on investment
portfolio 4 (4,466,341) (2,742,188)
-------------------------------------------------------- ---- ------------- -------------
Net movement on derivative financial assets and
liabilities (2,828,910) 3,333,189
-------------------------------------------------------- ---- ------------- -------------
Interest income (31,922,543) (26,981,790)
-------------------------------------------------------- ---- ------------- -------------
Interest expense 3,972,353 1,954,553
-------------------------------------------------------- ---- ------------- -------------
Operating cash flows before movement in working
capital (14,364,512) 11,121,647
-------------------------------------------------------- ---- ------------- -------------
Decrease/(increase) in cash collateral at broker 2,820,730 (4,260,712)
-------------------------------------------------------- ---- ------------- -------------
Increase in other assets (4,637) (1,788)
-------------------------------------------------------- ---- ------------- -------------
Increase/(decrease) in other liabilities 200,882 (63,571)
-------------------------------------------------------- ---- ------------- -------------
Movement in working capital 3,016,975 (4,326,071)
-------------------------------------------------------- ---- ------------- -------------
Interest received 29,657,468 26,201,075
-------------------------------------------------------- ---- ------------- -------------
Net cash flow from operating activities 18,309,931 32,996,651
-------------------------------------------------------- ---- ------------- -------------
Financing activities
-------------------------------------------------------- ---- ------------- -------------
Dividends paid to Shareholders (27,519,896) (27,519,896)
-------------------------------------------------------- ---- ------------- -------------
Payments under financing agreements (689,398,896) (617,305,171)
-------------------------------------------------------- ---- ------------- -------------
Proceeds under financing agreements 666,877,816 639,854,100
-------------------------------------------------------- ---- ------------- -------------
Finance costs paid (1,572,750) (1,861,358)
-------------------------------------------------------- ---- ------------- -------------
Net cash outflow from financing activities (51,613,726) (6,832,325)
-------------------------------------------------------- ---- ------------- -------------
Net (decrease)/increase in cash and cash equivalents (33,303,795) 26,164,326
-------------------------------------------------------- ---- ------------- -------------
Cash and cash equivalents at the start of the year 47,385,138 21,220,812
-------------------------------------------------------- ---- ------------- -------------
Cash and cash equivalents at the end of the year 14,081,343 47,385,138
-------------------------------------------------------- ---- ------------- -------------
The accompanying notes form an integral part of the financial
statements.
Notes to the Financial Statements
For the year ended 31 March 2023
1. General Information
Real Estate Credit Investments Limited ("RECI" or the "Company")
was incorporated in Guernsey, Channel Islands on 6 September 2005
with registered number 43634. The Company commenced its operations
on 8 December 2005.
The Company invests in real estate debt secured by commercial or
residential properties in the United Kingdom and Western Europe,
focusing primarily on those countries where it sees the changing
dynamics in the real estate debt market offering a sustainable deal
flow for the foreseeable future. The Company has adopted a
long-term strategic approach to investing and focuses on
identifying value in real estate debt. In making these investments
the Company uses the expertise and knowledge of its Alternative
Investment Fund Manager ("AIFM"), Cheyne Capital Management (UK)
LLP ("Cheyne" or the "Investment Manager").
The Company's shares are currently listed on the premium segment
of the Official List of the UK Listing Authority and trade on the
Main Market of the London Stock Exchange. The shares offer
investors a levered exposure to a portfolio of real estate credit
investments and aim to pay a quarterly dividend.
The Company's investment management activities are managed by
the Investment Manager, who is also the AIFM. The Company has
entered into an Investment Management Agreement (the "Investment
Management Agreement") under which the Investment Manager manages
its day-to-day investment operations, subject to the supervision of
the Company's Board of Directors. The Company is an Alternative
Investment Fund ("AIF") within the meaning of the Alternative
Investment Fund Managers Directive ("AIFMD") and accordingly the
Investment Manager has been appointed as the AIFM of the Company,
which has no employees of its own. For its services, the Investment
Manager receives a monthly Management Fee, expense reimbursements
and accrues a Performance Fee (see Note 18). The Company has no
ownership interest in the Investment Manager.
Citco Fund Services (Guernsey) Limited is the Administrator and
provides all administration services to the Company in this
capacity. The Bank of New York Mellon (International) Limited is
the Depositary and undertakes the custody of assets. Aztec
Financial Services (Guernsey) Limited is the Company Secretary.
2. Significant Accounting Policies
Statement of Compliance
The financial statements of the Company have been prepared in
accordance with International Financial Reporting Standards
("IFRS"), which comprise standards and interpretations approved by
the International Accounting Standards Board ("IASB"), and
International Accounting Standards and Standing Interpretations
Committee interpretations approved by the International Accounting
Standards Committee ("IASC") that remain in effect, together with
applicable legal and regulatory requirements of Guernsey Law and
the Listing Rules of the UK Listing Authority. The same accounting
policies, presentation and methods of computation have been
followed in these financial statements as were applied in the
preparation of the Company's audited financial statements for the
year ended 31 March 2022.
New Standards, Amendments and Interpretations Issued and
Effective for the Financial Year Beginning 1 April 2022
Amendment to International Accounting Standards ("IAS") 37 -
Onerous Contracts: Cost of Fulfilling a Contract
The amendments apply a 'direct related cost approach'. The costs
that relate directly to a contract to provide goods or services
include both incremental costs and an allocation of costs directly
related to contract activities. General and administrative costs do
not relate directly to a contract and are excluded unless they are
explicitly chargeable to the counterparty under the contract. The
amendments must be applied prospectively to contracts for which an
entity has not yet fulfilled its obligations at the beginning of
the annual reporting period in which it first applies the
amendments. The amendment is intended to provide clarity and help
ensure consistent application of the standard. Entities that have
previously applied the incremental cost approach will see increased
provisions to reflect the intrusion of costs related directly to
contract activities. Judgement will be required in determining
which costs are 'directly related to contract activities', but the
guidance in IFRS 15 Revenue from Contracts with Customers will be
relevant. The amendments to IAS 37 are effective for annual periods
beginning on or after 1 January 2022. The amendments have no
material impact on the financial statements of the Company.
New Standards, Amendments and Interpretations Issued but not
Effective for the Financial Year Beginning 1 April 2022 and not
Early Adopted
Title Effective for periods beginning
on or after
--------------------------------------------------- -------------------------------
IFRS 17 - Insurance Contracts 1 January 2023
--------------------------------------------------- -------------------------------
Amendments to IAS 1 - Classification of Liabilities 1 January 2023
as Current or Non-current
--------------------------------------------------- -------------------------------
Amendments to IAS 8 - Definition of Accounting 1 January 2023
Estimates
--------------------------------------------------- -------------------------------
Amendments to IAS 1 and IFRS Practice Statement 1 January 2023
2 - Disclosure of Accounting Policies
--------------------------------------------------- -------------------------------
Amendments to IAS 12 - Deferred Tax related 1 January 2023
to Assets and Liabilities arising from a Single
Transaction
--------------------------------------------------- -------------------------------
IFRS 17 Insurance Contracts has no material impact on the
financial statements as the Company does not have insurance
contracts.
Amendments to IAS 1 affect only the presentation of liabilities
in the Statement of Financial Position and not the amount or timing
of recognition of any asset, liability income or expenses, or the
information that the Company discloses about those items.
Amendments to IAS 8 are intended to provide preparers of
financial statements with greater clarity as to the definition of
accounting estimates, particularly in terms of the difference
between accounting estimates and accounting policies. Earlier
application is permitted. The Company did not early adopt these
amendments and expects that the amendments will have no material
impact on the financial statements.
Amendments to IAS 1 and IFRS Practice Statement 2 provide
guidance and examples to help entities apply materiality judgements
to accounting policy disclosures. Determining whether accounting
policies are material or not requires use of judgement. Earlier
application is permitted. The Company did not early adopt these
amendments and expects that the amendments will have no material
impact on the financial statements.
Amendments to IAS 12 clarify that where payments that settle a
liability are deductible for tax purposes, it is a matter of
judgement (having considered the applicable tax law) whether such
deductions are attributable for tax purposes to the liability
recognised in the financial statements (and interest expense) or to
the related asset component (and interest expense). Earlier
application is permitted. The Company did not early adopt these
amendments and expects that the amendments will have no material
impact on the financial statements.
Basis of Preparation
The financial statements of the Company are prepared under IFRS
on the historical cost or amortised cost basis except for financial
assets and liabilities classified at fair value through profit or
loss which have been measured at fair value.
The functional and presentation currency of the Company is
British Pounds ("GBP" or "GBP") which the Board considers best
represents the economic environment in which the Company
operates.
Going Concern
The Directors believe it is appropriate to adopt the going
concern basis in preparing the financial statements as, after due
consideration, they consider that the Company has adequate
resources to continue in operational existence for a period of at
least twelve months from the date of signing the audited financial
statements.
The Investment Manager performed an evaluation of each of its
positions in light of all macroeconomic factors on operating models
and valuations, and performed a granular analysis of the future
liquidity profile of the Company. A detailed cash flow profile of
each investment was completed, incorporating the probability of
likely delays to repayments, other stress tests (and additional
cash needs).
Taking account of the updated forecasting, the Directors
consider that the cash resources available as at 31 March 2023 of
GBP14.1 million (31 March 2022: GBP47.4 million), together with the
cash collateral at broker of GBP2.4 million (31 March 2022: GBP5.2
million), the liquidity of the market bond portfolio and the
financing available through activities such as repurchase
agreements as described in Note 13, are sufficient to cover normal
operational costs and current liabilities, including the proposed
dividend, and the expected funding of loan commitments as they fall
due for a period of at least twelve months from the date of signing
the audited financial statements. The Directors note that a key
assumption adopted in the going concern analysis is that leverage
through repurchase agreements is not withdrawn. Net debt (leverage
minus cash) as at 31 March 2023 was 19.1% (31 March 2022:
14.0%).
Notwithstanding the Directors' belief that this assumption
remains justifiable, the Directors have also determined a number of
mitigations to address a scenario where all outstanding repurchase
agreements are required to be settled as they fall due. Whilst
there would be a number of competing strategic factors to consider
before implementation of such options, the Directors believe that
these are credible and can generate sufficient liquidity to enable
the Company to meet its obligations as they fall due. Such
strategies include further sales of assets within the bond
portfolio, cessation or delay of any future dividends, obtaining
longer-term and non-recourse financing, and entering into some
off-balance sheet financing agreements which have partial recourse
to the Company.
In carrying out the Company's strategy, the Investment Manager
undertakes the following measures:
-- An initial and continuing detailed evaluation of each of its
positions in light of the various impacts of changing economic
circumstances on operating models and valuations;
-- Positive engagement with all borrowers and counterparties; and
-- Continued granular analysis of the future liquidity profile of the Company.
As disclosed in Note 19, as at 31 March 2023, the Company had
committed GBP572.0 million into the loan and bond portfolio of
which GBP367.8 million had been funded (31 March 2022: GBP522.9
million commitment of which GBP284.4 million had been funded). The
Investment Manager models these expected commitments and only funds
if the borrowers meet specific business plan milestones.
In consideration of this additional stressed scenario and
mitigations identified, the Directors consider that the Company has
adequate resources to continue in operational existence for a
period of at least twelve months from the date of signing the
financial statements.
Financial Assets at Fair Value Through Profit or Loss
The Company classifies its investments based on both the
Company's business model for managing those financial assets and
the contractual cash flow characteristics of the financial assets.
The portfolio of financial assets is managed and performance is
evaluated on a fair value basis. The Company is primarily focused
on fair value information and uses that information to assess the
assets' performance and to make decisions. The Company has not
taken the option to irrevocably designate any equity securities at
fair value through other comprehensive income. The contractual cash
flows of the Company's debt securities are not solely principal and
interest, and these securities are neither held for the purpose of
collecting contractual cash flows nor held both for collecting
contractual cash flows and for sale. The collection of contractual
cash flows is only incidental to achieving the Company's business
model's objective. Consequently, all investments are measured at
fair value through profit or loss. The gain or loss on reassessment
of fair value is recognised immediately in the Statement of
Comprehensive Income.
The interest receivable from loans and bonds were reported as
part of financial assets at fair value through profit or loss. The
related interest income and expense remained to be included under
interest income and expense accounts.
Financial Liabilities at Fair Value Through Profit or Loss
Financing agreements entered into for the purpose of efficient
portfolio management are measured at fair value through profit or
loss. The gain or loss on reassessment of fair value is required to
be split into the amount of change in fair value attributable to
changes in credit risk of the liability, presented in other
comprehensive income, and the remaining amount presented in profit
or loss. The Company's gain or loss on reassessment of fair value
is recognised immediately in the Statement of Comprehensive Income
as the Company has taken its position to recognise the full amount
of change in the fair value in profit or loss.
Financial Assets at Amortised Cost
A financial asset is measured at amortised cost if it is held
within a business model whose objective is to hold financial assets
in order to collect contractual cash flows and its contractual
terms give rise on specified dates to cash flows that are solely
payments of principal and interest on the principal amount
outstanding. This includes cash and cash equivalents, cash
collateral at broker and other assets.
Financial Liabilities at Amortised Cost
Other liabilities include all other liabilities.
Initial Measurement
Financial assets and liabilities at fair value through profit or
loss are measured initially at fair value, with transaction costs
for such financial assets and liabilities being recognised directly
in the Statement of Comprehensive Income.
Financial assets and liabilities at amortised cost are measured
initially at their fair value plus any directly attributable
incremental costs of acquisition or issue.
Purchases and sales of financial assets and liabilities at fair
value through profit or loss are accounted for at trade date.
Realised gain/(loss) on disposals of financial assets and
liabilities is calculated using the first-in, first-out ("FIFO")
method.
Subsequent Measurement
After initial measurement, the Company measures financial assets
which are classified as at fair value through profit or loss, at
fair value.
Financial liabilities held for trading are measured at fair
value through profit or loss, and all other financial liabilities
are measured at amortised cost, unless the fair value option is
applied. The Company classifies its financial liabilities as at
fair value through profit or loss.
After initial measurement, the Company measures financial assets
and liabilities which are classified as at amortised cost, at
amortised cost using effective interest method.
Recognition
All regular way purchases and sales of financial assets or
liabilities are recognised on the trade date, which is the date on
which the Company commits to purchase or sell the financial assets
or liabilities. Regular way purchases or sales are purchases or
sales of financial assets or liabilities that require delivery of
assets within the period generally established by regulation or
convention in the market place.
Derecognition
The Company derecognises a financial asset when the contractual
rights to the cash flows from the financial asset expire or it
transfers the financial asset and the transfer qualifies for
derecognition in accordance with IFRS 9.
The Company derecognises a financial liability when the
obligation specified in the contract is discharged, cancelled or
has expired.
Cash and Cash Equivalents
Cash and cash equivalents includes amounts held in
interest-bearing accounts and overdraft facilities with original
maturities of less than three months.
Derivative Financial Instruments
Derivative financial instruments used by the Company to manage
its exposure to foreign exchange arising from operational,
financing and investment activities are accounted for as financial
assets or liabilities at fair value through profit or loss.
Subsequent to initial recognition, derivative financial
instruments are stated at fair value. The gain or loss on
revaluation of fair value is recognised immediately in the
Statement of Comprehensive Income.
The fair value of an open forward foreign exchange contract is
calculated as the difference between the contracted rate and the
current forward rate that would close out the contract on the
reporting date. The change in value is recorded in net gains on
financial assets and liabilities through profit or loss in the
Statement of Comprehensive Income. Realised gains and losses are
recognised on the maturity of a contract, or when the contract is
closed out and they are transferred to realised gains or losses in
the Statement of Comprehensive Income.
Fair Value
All financial assets carried at fair value are initially
recognised at fair value which is equivalent to cost and
subsequently
re-measured at fair value. If independent prices are
unavailable, the fair value of the financial asset is estimated by
reference to market information which includes, but is not limited
to, broker marks, prices of comparable assets and using pricing
models incorporating discounted cash flow techniques and valuation
techniques such as modelling.
These pricing models apply assumptions regarding asset specific
factors and economic conditions generally, including delinquency
rates, severity rates, prepayment rates, default rates, maturity
profiles, interest rates and other factors that may be relevant to
each financial asset.
The objective of a fair value measurement is to determine the
price at which an orderly transaction would take place between
market participants on the measurement date, rather than the price
arrived at in a forced liquidation or distressed sale. Where the
Company has considered all available information and there is
evidence that the transaction was forced, it will not use such a
transaction price as being determinative of fair value.
Note 3 provides specific information regarding the determination
of fair value for the Company's bonds and loans.
Offsetting Financial Instruments
Financial assets and liabilities are offset and the net amount
is reported within assets and liabilities when there is a legally
enforceable right to set off the recognised amounts and there is an
intention to settle on a net basis, or realise the asset and settle
the liability simultaneously.
Expenses Attributable to Any Issue of Shares
The expenses of the Company attributable to any issue of shares
are those which are necessary to implement such an issue including
registration, listing and admission fees, corporate finance fees,
printing, advertising and distribution costs, legal fees and other
applicable expenses. They are recognised as incurred and are
included as a reduction to Reserves in the Statement of Changes in
Equity.
Foreign Currency Transactions
Transactions in foreign currencies are translated at the foreign
exchange rate ruling at the date of the transaction. Monetary
assets and liabilities denominated in foreign currencies at the
Statement of Financial Position date are translated to GBP at the
foreign exchange rate ruling at that date.
Foreign exchange differences arising on translation are
recognised in gains and losses on financial assets and liabilities
at fair value through profit or loss in the Statement of
Comprehensive Income. Foreign currency denominated non-monetary
assets and liabilities that are measured in terms of historical
cost in a foreign currency are translated using the exchange rate
at the date of transaction.
Non-monetary assets and liabilities denominated in foreign
currencies that are stated at fair value are translated to GBP at
foreign exchange rates ruling at the reporting date. Differences
arising on translation of these non-monetary assets and liabilities
between valuation points are recognised in the Statement of
Comprehensive Income.
Interest Income
Interest income from financial assets at fair value through
profit or loss are recognised within interest income in the
Statement of Comprehensive Income using the effective interest
method.
Expenses
All expenses are included in the Statement of Comprehensive
Income on an accrual basis.
Taxation
The Company is a tax-exempt Guernsey limited company and
accordingly, no provision for tax is made.
Other Receivables
Other receivables do not carry any interest and are short term
in nature and are accordingly stated at their nominal value as
reduced by appropriate allowances for estimated irrecoverable
amounts.
Financial Liabilities and Equity
Financial liabilities and equity are classified according to the
substance of the underlying contractual arrangements. An equity
instrument is any contract that evidences a residual interest in
the assets of the Company after deducting all of its
liabilities.
Financial liabilities and equity are initially recorded at the
proceeds received, net of issue costs and subsequently at amortised
cost. The shares have been classified as equity.
Other Liabilities
Other liabilities are not interest-bearing and are stated at
their accrued value.
Segment Information
The Company has two reportable segments, being the Bilateral
Loan and Bond Portfolio and the Market Bond Portfolio. The real
estate debt investment strategy of the Company focuses on secured
commercial and residential debt in the United Kingdom and Western
Europe. Each segment engages in separate business activities and
the results of each segment are regularly reviewed by the Board of
Directors which fulfils the role of Chief Operating Decision Maker
for performance assessment purposes.
Financing Agreements
The Company enters into repurchase agreements for the purpose of
efficient portfolio management. There are no material revenues
arising from the use of repurchase agreements and transaction costs
are embedded in the price of the investments and are not separately
identifiable. Securities purchased under agreements to resell are
valued at fair value and adjusted for any movements in foreign
exchange rates. Interest rates vary for each repurchase agreement
and are set at the initiation of each agreement. It is the lender's
policy to take custody of securities purchased under repurchase
agreements and to value the securities on a daily basis to protect
the lender in the event the securities are not repurchased by the
Company. The Company will generally post additional collateral if
the market value of the underlying securities decline and are less
than the face value of the repurchase agreements plus any accrued
interest. In the event of default on the obligation to repurchase,
the lender has the right to liquidate the collateral and apply the
proceeds in satisfaction of the obligation. In the event of default
or bankruptcy by the counterparty to the agreement, realisation
and/or retention of the collateral or proceeds may be subject to
legal proceedings.
Financial Guarantee
Financial guarantees require the Company to make specified
payments to reimburse the holder of the guarantee for a loss it
incurs because a specified debtor fails to make payment when due in
accordance with the original or modified terms of a debt
instrument. Financial guarantees are initially recognised at their
fair value, which is normally evidenced by the amount of fees
received. This amount is amortised on a straight line basis over
the life of the guarantee. At the end of each reporting period, the
guarantees are measured at the higher of (i) the amount of the loss
allowance for the guaranteed exposure determined based on the
expected loss model and (ii) the remaining unamortised balance of
the amount at initial recognition.
3. Critical Accounting Judgements and Key Sources of Estimation
Uncertainty
In the process of applying the Company's accounting policies
(described in Note 2), the Company has determined that the
following judgements and estimates have the most significant effect
on the amounts recognised in the financial statements:
Critical Accounting Judgements
Classification of Financial Assets at Fair Value Through Profit
or Loss
As described on pages 78-79, classification and measurement of
financial assets under IFRS 9 are driven by the entity's business
model for managing financial assets and the contractual cash flow
characteristics of those financial assets.
As further described on pages 78-79, the contractual cash flow
characteristics for loan investments are not solely payments of
principal and interest. For the loans held via Stornoway Finance
S.à r.l. and ENIV S.à r.l., the Company receives the return for
each underlying loan net of expenses and so it is not considered to
be a basic lending arrangement under the standard. As such, these
loan investments are required to be measured at fair value through
profit or loss. The loans held via ENIV S.à r.l. are listed and
considered bonds.
In making the judgement regarding Stornoway Finance S.à r.l. and
ENIV S.à r.l., the Directors have considered the power the Company
has to influence the investment decisions of the Special Purpose
Vehicle housing the underlying loans and where the Company holds
the majority interest it has been determined that the contractual
cash flow characteristics for a basic lending arrangement would be
met. However, IFRS 9 also requires an assessment of the business
model within which assets are held. In the case of the Company's
loan investments the Directors have determined that they monitor
and evaluate business performance, manage risk and compensate the
Investment Manager based on fair value measures. The business model
is therefore not solely for holding and collecting contractual cash
flows to maturity and requires all loan investments to be measured
at fair value through profit or loss.
The Company's bond investments are classified and measured at
fair value through profit or loss in accordance with the above fact
pattern.
Were it to be determined that the business model for managing
financial assets and the contractual cash flow characteristics of
those financial assets were not described above, these assets would
be classified and measured at amortised cost with provisions made
for expected credits losses and changes to expected credit losses
at each reporting date.
Key Sources of Estimation Uncertainty
Valuation of Financial Assets at Fair Value Through Profit or
Loss
In accordance with the Company's accounting policies, the fair
value of market bonds is based on quoted prices where such prices
are available from a third party in a liquid market.
The Company has made loans and bonds into structures to gain
exposure to real estate secured debt in, but not limited to, the
United Kingdom and Western Europe. These loans are not traded in an
active market and there are no independent quotes available for
these loans. The fair values of financial instruments that are not
traded in an active market are determined using valuation
techniques such as discounted cash flows models. The rate used to
discount future cash flows represents key source of estimation
uncertainty that has material impact on the valuation of the
investment portfolio. In the absence of market observable inputs,
this uncertainty translates into a wide range of appropriate
discount rates. The Investment Manager believes that the loan or
bond's own initial effective interest rate represents the most
appropriate point estimate within that range.
The Investment Manager has considered relevant geopolitical and
macro economic factors including the rise of market interest rate
and continues to believe that this key judgement remains
appropriate due to the bespoke nature of the investment portfolio
and the dislocation between the yield of these assets and the
market interest rate. The fair value of these loans is linked
directly to the value of the real estate loans in the underlying
structure the Company invests in, which are determined based on
modelled expected cash flows (drawdown principal and interest
repayments, and maturity dates) with effective yields ranging from
6.2% to 13.2% (31 March 2022: 5.1% to 13.3%).
As highlighted in the long-term viability section in the
Strategic Report, the Investment Manager performed an evaluation of
each of its positions, taking into account all relevant
geopolitical and macro economic risks, on its operating models and
valuations. A detailed cash flow profile of each investment was
completed, incorporating the probability of likely delays to
repayments, other stress tests (and additional cash needs); these
were taken into account in the modelled expected cash flows for 31
March 2023. Adjustments in the fair value of the real estate loans
are considered in light of changes in the credit quality of the
borrower and underlying property collateral. On origination of the
loan, the Investment Manager performs due diligence on the borrower
and related security/property. This includes obtaining a valuation
of the underlying property (to assess loan-to-value of the
investment). In most instances, the terms of the loan require
periodic re-valuation of the underlying property to check against
loan-to-value covenants.
The valuation policy for contingent fees and potential profit
participations provided for in contractual arrangements is to mark
them at fair value, which in most instances have been obtained for
a zero or de-minimis cost, and they are held at this value until
there is sufficient evidence that the position should be
revalued.
The Company has been closely monitoring this and indeed all
other material macro sources of uncertainty related developments,
such as inflation, supply chains, and other events (including The
Ukraine effect, Covid-19 pandemic, the effects of climate change
and cyber security), to ensure that these updated assumptions and
any potential impact have been reflected in the valuation of
financial assets at fair value through profit or loss as at 31
March 2023. Future valuation might change significantly in the
future.
4. Net (Losses)/Gains on Financial Assets and Liabilities at
Fair Value Through Profit or Loss
31 Mar 2023 31 Mar 2022
GBP GBP
------------------------------------------------------- ----------- -----------
Net gains/(losses)
------------------------------------------------------- ----------- -----------
Net (losses)/gains on market bond portfolio (8,155,580) 369,084
------------------------------------------------------- ----------- -----------
Net gains on bilateral loan and bond portfolio 12,621,921 2,373,105
------------------------------------------------------- ----------- -----------
Net (losses)/gains on foreign exchange instruments
and other foreign currency transactions (5,730,490) 2,609,285
------------------------------------------------------- ----------- -----------
Net (losses)/gains on financial assets and liabilities
at fair value through profit or loss (1,264,149) 5,351,474
------------------------------------------------------- ----------- -----------
5. Operating Expenses
31 Mar 2023 31 Mar 2022
Note GBP GBP
----------------------------------------------------- ---- ----------- -----------
Investment management, administration and depositary
fees
----------------------------------------------------- ---- ----------- -----------
Investment management fees 18 4,296,688 4,367,244
----------------------------------------------------- ---- ----------- -----------
Administration fees 18 276,595 261,584
----------------------------------------------------- ---- ----------- -----------
Depositary fees 18 65,137 65,969
----------------------------------------------------- ---- ----------- -----------
4,638,420 4,694,797
----------------------------------------------------- ---- ----------- -----------
Other operating expenses
----------------------------------------------------- ---- ----------- -----------
Legal fees 456,542 298,801
----------------------------------------------------- ---- ----------- -----------
Directors' fees 215,000 213,625
----------------------------------------------------- ---- ----------- -----------
Audit fees 140,775 115,250
----------------------------------------------------- ---- ----------- -----------
Corporate secretary fees 96,214 87,761
----------------------------------------------------- ---- ----------- -----------
Registrar fees 60,000 (23,127)
----------------------------------------------------- ---- ----------- -----------
Fees to auditor for non-audit services 39,500 37,500
----------------------------------------------------- ---- ----------- -----------
D&O insurance fees 24,547 (9,558)
----------------------------------------------------- ---- ----------- -----------
Regulatory body expenses 23,732 36,266
----------------------------------------------------- ---- ----------- -----------
Research fees 35,000 60,388
----------------------------------------------------- ---- ----------- -----------
Other expenses 413,932 329,648
----------------------------------------------------- ---- ----------- -----------
1,505,242 1,146,554
----------------------------------------------------- ---- ----------- -----------
Total operating expenses 6,143,662 5,841,351
----------------------------------------------------- ---- ----------- -----------
The ongoing costs of the Company are shown in the Key
Information Document (KID) published on the Company's website. The
total figure of 2.23% (31 March 2022: 2.36%) is made up of the
Investment Manager's fee of 1.25% (31 March 2022: 1.25%), other
ongoing costs of 0.42% (31 March 2022: 0.46%), and finance costs
(which are disclosed separately in the financial statements) of
0.56% (31 March 2022: 0.65%). The finance costs may vary and are
only incurred to increase the overall returns to investors.
6. Interest Income and Finance Costs
The following table details interest income and finance costs
from financial assets and liabilities for the year:
31 Mar 2023 31 Mar 2022
GBP GBP
------------------------------------------------------- ----------- -----------
Interest income
------------------------------------------------------- ----------- -----------
Real Estate Credit Investments - market bond portfolio 4,960,473 3,241,955
------------------------------------------------------- ----------- -----------
Real Estate Credit Investments - bilateral loan
and bond portfolio 26,747,271 23,729,772
------------------------------------------------------- ----------- -----------
Cash and cash equivalents and other receivables 214,799 10,063
------------------------------------------------------- ----------- -----------
Total interest income 31,922,543 26,981,790
------------------------------------------------------- ----------- -----------
Finance costs:
------------------------------------------------------- ----------- -----------
Cost of financing agreements (3,972,353) (1,954,553)
------------------------------------------------------- ----------- -----------
Total finance costs (3,972,353) (1,954,553)
------------------------------------------------------- ----------- -----------
7. Dividends
31 Mar 2023 31 Mar 2022
GBP GBP
---------------------------------------------------- ----------- -----------
Share dividends
---------------------------------------------------- ----------- -----------
Fourth dividend for the year ended 31 March 2022/31
March 2021 6,879,974 6,879,974
---------------------------------------------------- ----------- -----------
First dividend for the year ended 31 March 2023/31
March 2022 6,879,974 6,879,974
---------------------------------------------------- ----------- -----------
Second dividend for the year ended 31 March 2023/31
March 2022 6,879,974 6,879,974
---------------------------------------------------- ----------- -----------
Third dividend for the year ended 31 March 2023/31
March 2022 6,879,974 6,879,974
---------------------------------------------------- ----------- -----------
Dividends paid to Shareholders in the year 27,519,896 27,519,896
---------------------------------------------------- ----------- -----------
The total dividends paid during the financial year ended 31
March 2023 amounted to 12 pence per share (31 March 2022: 12 pence
per share).
Under Guernsey law, companies can pay dividends provided they
satisfy the solvency test prescribed under the Companies (Guernsey)
Law, 2008 as amended, which considers whether a company is able to
pay its debts when they become due and whether the value of a
company's assets is greater than its liabilities.
The Directors considered that the Company satisfied the solvency
test for all dividend payments during the period from 1 April 2022
to 31 March 2023.
8. Earnings per share
The calculation of the basic and diluted earnings per share is
based on the following data:
31 Mar 31 Mar 2022
2023
--------------------------------------------------- ----------- -----------
Net earnings attributable to shares (GBP) 20,550,319 24,574,377
--------------------------------------------------- ----------- -----------
Weighted average number of shares for the purposes
of basic and diluted earnings per share 229,332,478 229,332,478
--------------------------------------------------- ----------- -----------
Earnings per share
--------------------------------------------------- ----------- -----------
Basic and diluted (pence) 9.0 10.7
--------------------------------------------------- ----------- -----------
9. Categories of Financial Instruments
The following table details the categories of financial assets
and liabilities held by the Company at the year end date.
31 Mar 2023 31 Mar 2022
GBP GBP
------------------------------------------------------- ----------- -----------
Assets
------------------------------------------------------- ----------- -----------
Financial assets at fair value through profit or loss:
------------------------------------------------------- ----------- -----------
Real Estate Credit Investments - market bond portfolio 49,243,187 98,450,555
------------------------------------------------------- ----------- -----------
Real Estate Credit Investments - bilateral loan and
bond portfolio 351,498,723 295,890,549
------------------------------------------------------- ----------- -----------
Investments at fair value through profit or loss 400,741,910 394,341,104
------------------------------------------------------- ----------- -----------
Derivative financial assets:
------------------------------------------------------- ----------- -----------
Forward foreign exchange contracts 1,756,118 -
------------------------------------------------------- ----------- -----------
Financial assets at amortised cost:
------------------------------------------------------- ----------- -----------
Cash and cash equivalents 14,081,343 47,385,138
------------------------------------------------------- ----------- -----------
Cash collateral at broker 2,383,962 5,204,692
------------------------------------------------------- ----------- -----------
Other assets 27,345 22,708
------------------------------------------------------- ----------- -----------
Total assets 418,990,678 446,953,642
------------------------------------------------------- ----------- -----------
Liabilities
------------------------------------------------------- ----------- -----------
Financial liabilities at fair value through profit
or loss:
------------------------------------------------------- ----------- -----------
Financing agreements 80,154,134 100,368,732
------------------------------------------------------- ----------- -----------
Derivative financial liabilities:
------------------------------------------------------- ----------- -----------
Forward foreign exchange contracts - 1,072,792
------------------------------------------------------- ----------- -----------
Financial liabilities at amortised cost:
------------------------------------------------------- ----------- -----------
Other liabilities 1,870,637 1,576,634
------------------------------------------------------- ----------- -----------
Total liabilities 82,024,771 103,018,158
------------------------------------------------------- ----------- -----------
The value of the bond portfolio assets was GBP231.4 million as
at 31 March 2023, excluding accrued interest of GBP4.3 million (31
March 2022: GBP282.4 million, excluding accrued interest of GBP2.1
million).
See Note 16 for a summary of the movement in fair value in the
Company's investments for the year.
10. Derivative Contracts
Forward Foreign Exchange Contracts
The following forward foreign exchange contracts were open as at
31 March 2023:
Unrealised
Settlement gain
Counterparty date Buy currency Buy amount Sell currency Sell amount GBP
--------------------- ------------ ------------- ----------- ------------- ------------- ----------
The Bank of New York
Mellon 19 May 2023 GBP 163,823,152 EUR (184,070,000) 1,756,118
--------------------- ------------ ------------- ----------- ------------- ------------- ----------
Unrealised gain on forward foreign exchange contracts 1,756,118
--------------------------------------------------------------------------------------------- ----------
The following forward foreign exchange contracts were open as at
31 March 2022:
Unrealised
Settlement loss
Counterparty date Buy currency Buy amount Sell currency Sell amount GBP
--------------------- ------------ ------------- ----------- ------------- ------------- -----------
The Bank of New York
Mellon 20 May 2022 GBP 161,432,186 EUR (192,000,000) (1,072,792)
--------------------- ------------ ------------- ----------- ------------- ------------- -----------
Unrealised loss on forward foreign exchange contracts (1,072,792)
--------------------------------------------------------------------------------------------- -----------
11. Other Liabilities
31 Mar 2023 31 Mar 2022
GBP GBP
----------------------------------------------------- ----------- -----------
Investment management, depositary and administration
fees payable
----------------------------------------------------- ----------- -----------
Investment management fees payable 358,118 365,525
----------------------------------------------------- ----------- -----------
Depositary fees payable 33,090 27,086
----------------------------------------------------- ----------- -----------
Administration fees payable 41,939 48,392
----------------------------------------------------- ----------- -----------
433,147 441,003
----------------------------------------------------- ----------- -----------
Other operating payables
----------------------------------------------------- ----------- -----------
Interest payable 287,023 193,902
----------------------------------------------------- ----------- -----------
Registrar fees payable 88,917 28,917
----------------------------------------------------- ----------- -----------
Legal fees payable 73,800 27,199
----------------------------------------------------- ----------- -----------
Directors' fees payable 53,750 48,812
----------------------------------------------------- ----------- -----------
Audit fees payable 30,775 85,250
----------------------------------------------------- ----------- -----------
Corporate secretary fees payable 18,750 18,750
----------------------------------------------------- ----------- -----------
Research fees payable 17,644 17,839
----------------------------------------------------- ----------- -----------
Other expense accruals 866,831 714,962
----------------------------------------------------- ----------- -----------
1,437,490 1,135,631
----------------------------------------------------- ----------- -----------
Total liabilities 1,870,637 1,576,634
----------------------------------------------------- ----------- -----------
12. Structured Entities Not Consolidated
As at 31 March 2023 and 31 March 2022, the Company had an
interest in the following structured entities. The Company has
concluded that the unlisted entities in which it invests, but that
it does not consolidate, meet the definition of structured entities
because:
-- the Company has obtained funds for the purpose of providing
investors with investment management services;
-- the Company's business purpose, which was communicated
directly to investors, is investing solely for returns from capital
appreciation and investment income; and
-- the performance of investments is measured and evaluated on a fair value basis.
This conclusion will be reassessed on an annual basis, if any of
these criteria or characteristics change.
As a result, the Company recognises its interests in structured
entities as investments at fair value through profit or loss in
accordance with IFRS 10 and therefore there is no requirement to
consolidate in full. However, in line with IFRS 12 Disclosure of
Interest in Other Entities, the details of the interests in the
unconsolidated structured entities are disclosed below. The maximum
exposure to loss is the carrying amount of the financial assets
held which is equal to the fair value of loans and units in funds
as at 31 March 2023 and 31 March 2022.
31 March 2023 Fair value Undrawn
of loans*** commitment Nature and purpose Equity Percentage Other
Name GBP GBP of the entity Location held held exposure*
------------------ ------------ ----------- ----------------------- ---------- ------ ---------- ----------
Real Estate Loan
Funding (RELF)**
------------------ ------------ ----------- ----------------------- ---------- ------ ---------- ----------
To invest in
Earlsfield real United
Earlsfield 12,612,167 707,833 estate Kingdom No - % No
------------------ ------------ ----------- ----------------------- ---------- ------ ---------- ----------
To invest in Kensington United
Kensington 8,896,085 10,737,000 real estate Kingdom No - % No
------------------ ------------ ----------- ----------------------- ---------- ------ ---------- ----------
To invest in
Lifestory real United
Lifestory 8,215,843 4,434,157 estate Kingdom No - % No
------------------ ------------ ----------- ----------------------- ---------- ------ ---------- ----------
To invest in
Pamplona real
Pamplona 3,084,772 1,469,228 estate Luxembourg No - % No
------------------ ------------ ----------- ----------------------- ---------- ------ ---------- ----------
To invest in
Ruby 2,807,680 8,577,320 Ruby real estate Luxembourg No - % No
------------------ ------------ ----------- ----------------------- ---------- ------ ---------- ----------
To invest in
Cheyne French Cheyne French
Funding Sub-Fund Funding Sub-Fund
3 11,650,667 3,630,876 3 real estate Luxembourg No - % No
------------------ ------------ ----------- ----------------------- ---------- ------ ---------- ----------
To invest in
Cheyne French
Cheyne French Funding Sub-Fund
Funding Sub-Fund 8
8 22,663,417 7,788,478 real estate France No - % No
------------------ ------------ ----------- ----------------------- ---------- ------ ---------- ----------
To invest in
Cheyne French Cheyne French
Funding Sub-Fund Funding Sub-Fund
9 8,470,707 2,477,156 9 real estate France No - % No
------------------ ------------ ----------- ----------------------- ---------- ------ ---------- ----------
* Other exposure indicates if the investment in the structured
entity comes with any associated potential valuation uplift. These
can include, but are not limited to: profit share, variable exit
fees, and exposure to enterprise value uplift.
** The total loan exposure on RELF includes financing within the
RELF structure.
***This amount excludes interest receivables.
31 March 2022 Fair value Undrawn
of loans*** commitment Nature and purpose Equity Percentage Other
Name GBP GBP of the entity Location held held exposure*
------------------ ------------ ----------- ------------------ -------- ------ ---------- ----------
Real Estate Loan
Funding (RELF)**
------------------ ------------ ----------- ------------------ -------- ------ ---------- ----------
To invest in
Earlsfield real United
Earlsfield 6,665,679 6,687,513 estate Kingdom No - % No
------------------ ------------ ----------- ------------------ -------- ------ ---------- ----------
To invest in
Cheyne French Cheyne French
Funding Sub-Fund Funding Sub-Fund
3 8,418,393 6,278,159 3 real estate France No - % No
------------------ ------------ ----------- ------------------ -------- ------ ---------- ----------
To invest in
Cheyne French
Cheyne French Funding Sub-Fund
Funding Sub-Fund 7
7 339,932 665,701 real estate France No - % No
------------------ ------------ ----------- ------------------ -------- ------ ---------- ----------
To invest in
Cheyne French Cheyne French
Funding Sub-Fund Funding Sub-Fund
8 15,806,040 13,480,123 8 real estate France No - % No
------------------ ------------ ----------- ------------------ -------- ------ ---------- ----------
To invest in
Cheyne French Cheyne French
Funding Sub-Fund Funding Sub-Fund
9 7,206,459 3,322,312 9 real estate France No - % No
------------------ ------------ ----------- ------------------ -------- ------ ---------- ----------
* Other exposure indicates if the investment in the structured
entity comes with any associated potential valuation uplift. These
can include, but are not limited to: profit share, variable exit
fees, and exposure to enterprise value uplift.
** The total loan exposure on RELF includes financing within the
RELF structure.
***This amount excludes interest receivables.
The Company did not provide support/assistance without a
contractual obligation to do so during the year other than as part
of normal investment activity, and the Company has no intention to
provide support/assistance to the entities.
13. Financing Agreements
The Company enters into repurchase agreements with several banks
to provide leverage. This financing is collateralised against
certain of the Company's bond portfolio assets with a fair value
totalling GBP139.9 million (31 March 2022: GBP212.7 million) and a
weighted average cost of 5.86% (31 March 2022: 1.2%) per annum. The
contractual maturity period of the repurchase arrangements is 3 to
6 months (31 March 2022: 3 to 6 months).
This short-term financing is shown as a current liability in the
Statement of Financial Position whereas the collateralised assets
are shown as non-current. The movement in financing agreement
amounting to GBP22.5 million (31 March 2022: GBP20.6 million) and
finance cost amounting to GBP1.6 million (31 March 2022: GBP1.9
million) are shown as financing activity in the Statement of Cash
Flows.
During the financial year ended 31 March 2023, the Company
continued to maintain some off-balance sheet financing agreements.
These facilities entered into during the previous financial year do
not have recourse to the Company, and the lending is structured
using off-balance entities, and secured against the specific loans
involved. The aggregate amount of these off-balance sheet loans as
at 31 March 2023 was GBP20.6 million (31 March 2022: GBP2.8
million).
During the financial year ended 31 March 2023, the Company also
entered into an off-balance sheet financing agreement which does
have partial recourse to the Company. The amount of partial
recourse commitment as at 31 March 2023 was GBP2.9 million (31
March 2022: GBPNil). No expected loss from providing this guarantee
has been recognised in these financial statements and no additional
collateralisation has been paid as of year end.
14. Share Capital
The issued share capital of the Company consists of shares and
its capital as at the year end is represented by the net proceeds
from the issuance of shares and profits retained up to that date.
The Company does not have any externally imposed capital
requirements. As at 31 March 2023, the Company had capital of
GBP337.0 million (31 March 2022: GBP343.9 million).
31 Mar 2023 31 Mar 2022
Number of Number of
Shares Shares
--------------------------------- ----------- -----------
Authorised Share Capital
--------------------------------- ----------- -----------
Shares of no par value each Unlimited Unlimited
--------------------------------- ----------- -----------
Shares issued and fully paid
--------------------------------- ----------- -----------
Balance at the start of the year 229,332,478 229,332,478
--------------------------------- ----------- -----------
Balance at the end of the year 229,332,478 229,332,478
--------------------------------- ----------- -----------
The Company manages its capital to ensure that it will be able
to continue as a going concern while maximising the return to
Shareholders. The Company's overall strategy was outlined in the
Prospectus which is published on the Company's website. The capital
structure of the Company consists of the equity of the Company as
disclosed in the Statement of Changes in Equity.
15. Financial Instruments and Associated Risks
The Company's investment activities expose it to various types
of risk which are associated with the financial instruments and
markets in which it invests. The Company's risk management policies
seek to minimise the potential adverse effects of these risks on
the Company's financial performance.
The financial risks to which the Company is exposed include
market price risk, interest rate risk, liquidity risk, currency
risk, credit risk, prepayment and re-investment risk. In certain
instances as described more fully below, the Company enters into
derivative transactions in order to help mitigate particular types
of risk.
(a) Market Risk
Market risk is the risk that the fair value and future cash
flows of a financial instrument will fluctuate because of changes
in market factors. Market risk comprises interest rate risk,
currency risk and other price risk.
The Company's strategy on the management of market risk is
driven by the Company's investment objectives detailed in Note 1
which in respect of the Company is to invest primarily in debt
secured by commercial or residential properties in the United
Kingdom and Western Europe.
The Company's market risk is managed on a daily basis by the
Investment Manager in accordance with policies and procedures
detailed below.
The sensitivity analysis below is based on a change in one
variable while holding all other variables constant. In practice,
this is unlikely to occur, and changes in some of the assumptions
may be correlated - for example, change in foreign currency rate
and change in market values. In addition, as the sensitivity
analysis uses historical data as a basis for determining future
events, it does not encompass all possible scenarios, particularly
those that are of an extreme nature.
(i) Currency Risk
Currency risk is the risk that the fair value or future cash
flows of a financial instrument will fluctuate because of changes
in foreign exchange rates.
The Company is exposed to currency risk to the extent that
foreign exchange rates fluctuate as it has financial instruments
that are denominated in currencies other than GBP.
The Company manages its foreign exchange exposure forward
foreign exchange contracts. These instruments are detailed in Note
10.
The currency profile of the Company, including derivatives at
fair value, at the year end date was as follows:
Forward Foreign Net
Monetary Monetary Currency Exchange currency
Assets Liabilities Contracts exposure
As at 31 March 2023: GBP GBP GBP GBP
--------------------- ----------- ------------- ------------------- -----------
Currency
--------------------- ----------- ------------- ------------------- -----------
GBP 242,499,869 (60,997,713) 163,823,152 345,325,308
--------------------- ----------- ------------- ------------------- -----------
EUR 174,728,260 (21,027,058) (162,067,034) (8,365,832)
--------------------- ----------- ------------- ------------------- -----------
USD 6,431 - - 6,431
--------------------- ----------- ------------- ------------------- -----------
417,234,560 (82,024,771) 1,756,118 336,965,907
--------------------- ----------- ------------- ------------------- -----------
Forward Foreign Net
Monetary Monetary Currency Exchange currency
Assets Liabilities Contracts exposure
As at 31 March 2022: GBP GBP GBP GBP
--------------------- ----------- ------------- ------------------- -----------
Currency
--------------------- ----------- ------------- ------------------- -----------
GBP 236,062,842 (50,234,754) 161,432,186 347,260,274
--------------------- ----------- ------------- ------------------- -----------
EUR 210,880,008 (51,710,612) (162,504,978) (3,335,582)
--------------------- ----------- ------------- ------------------- -----------
USD 10,792 - - 10,792
--------------------- ----------- ------------- ------------------- -----------
446,953,642 (101,945,366) (1,072,792) 343,935,484
--------------------- ----------- ------------- ------------------- -----------
As at 31 March 2023, had the GBP strengthened by 5% or 10% in
relation to all currency exposure of the Company with all other
variables held constant, the equity of the Company and the net
profit/(loss) per the Statement of Comprehensive Income would have
changed by the amounts shown below. The analysis is performed on
the same basis for 2022.
By 5% 31 Mar 2023 31 Mar 2022
GBP GBP
------ ----------- -----------
EUR (418,292) (166,779)
------ ----------- -----------
USD 322 540
------ ----------- -----------
Total (417,970) (166,239)
------ ----------- -----------
By 10% 31 Mar 2023 31 Mar 2022
GBP GBP
------- ----------- -----------
EUR (836,583) (333,558)
------- ----------- -----------
USD 643 1,079
------- ----------- -----------
Total (835,940) (332,479)
------- ----------- -----------
A 5% or 10% weakening of the GBP against the above currencies
would have resulted in an equal but opposite effect on the equity
of the Company and net profit/(loss) per the Statement of
Comprehensive Income to the amounts shown above, on the basis that
all other variables remained constant.
The sensitivity analysis reflects how the equity of the Company
would have been affected by changes in the relevant risk variable
that were reasonably possible at the reporting date. Management has
determined that a fluctuation of 5% in foreign exchange rates is
reasonably possible, considering the environment in which the
Company operates.
(ii) Interest Rate Risk
Interest rate risk is the risk that the fair value and future
cash flows of a financial instrument will fluctuate because of
changes in market interest rates.
The Company's interest rate risk is managed by the Investment
Manager in accordance with policies and procedures detailed
below.
The Company invests in fixed and floating rate real estate
related debt assets (which includes loans and bonds). Interest rate
risk arises from the effects of fluctuations in the prevailing
levels of market interest rates on the fair value of financial
assets and liabilities and future cash flow.
A fundamental principle of bond investing is that market
interest rates and bond prices generally move in opposite
directions. When market interest rates rise, prices of fixed-rate
bonds fall. However, as explained under the key sources of
estimation uncertainty in Note 3, the Investment Manager believes
that the loan or bond's own initial effective interest rate
represents the most appropriate rate to discount future cash flows.
The use of this judgement limits the impact of the fluctuations in
market interest rates on the valuation of the bilateral bonds and
loans portfolio.
The Investment Manager has considered relevant geopolitical and
macro economic factors including the rise of market interest rate
during the year and continues to believe that this key judgement
remains appropriate due to the bespoke nature of the investment
portfolio and the dislocation between the yield of these assets and
the market interest rate.
Had movement in market interest rates been fully reflected in
the valuation of fixed-rate assets held by the Company, the
estimated impact of a rise of 1% (100 basis points) or 5% (500
basis points) (31 March 2022: 1% (100 basis points) or 5% (500
basis points)) on the net asset value ("NAV") of the Company, is a
decrease of GBP6.3 million or GBP31.7 million (31 March 2022:
GBP3.7 million or GBP18.3 million), respectively. A decrease in
interest rates by 100 basis points or 500 basis points is estimated
to result in an increase in the NAV of the Company by a similar
amount. These estimates are calculated based on the fair value of
the fixed-rate securities including accrued interest held by the
Company as at 31 March 2023 and 31 March 2022, and their weighted
average lives.
The interest rate profile of the Company as at 31 March 2023 was
as follows:
Fixed Floating Non-interest Total
GBP GBP bearing GBP
GBP
------------------------------------- ----------- ------------ ------------ ------------
Financial assets at fair value
through profit or loss 287,268,165 99,067,135 14,406,610* 400,741,910
------------------------------------- ----------- ------------ ------------ ------------
Cash and cash equivalents - 14,081,343 - 14,081,343
------------------------------------- ----------- ------------ ------------ ------------
Cash collateral at broker - 2,383,962 - 2,383,962
------------------------------------- ----------- ------------ ------------ ------------
Derivative financial assets
------------------------------------- ----------- ------------ ------------ ------------
- forward foreign exchange contracts - - 1,756,118 1,756,118
------------------------------------- ----------- ------------ ------------ ------------
Other assets - - 27,345 27,345
------------------------------------- ----------- ------------ ------------ ------------
Financing agreements - (80,154,134) - (80,154,134)
------------------------------------- ----------- ------------ ------------ ------------
Other liabilities - - (1,870,637) (1,870,637)
------------------------------------- ----------- ------------ ------------ ------------
Total 287,268,165 35,378,306 14,319,436 336,965,907
------------------------------------- ----------- ------------ ------------ ------------
* Accrued interest related to financial assets at fair value
through profit or loss.
The maturity profile of the Company as at 31 March 2023 was as
follows:
Within one One to five Over five Total
year years years GBP
GBP GBP GBP
------------------------------------- ------------ ----------- ----------- ------------
Financial assets at fair value
through profit or loss 81,576,013 150,257,260 168,908,637 400,741,910
------------------------------------- ------------ ----------- ----------- ------------
Cash and cash equivalents 14,081,343 - - 14,081,343
------------------------------------- ------------ ----------- ----------- ------------
Cash collateral at broker 2,383,962 - - 2,383,962
------------------------------------- ------------ ----------- ----------- ------------
Derivative financial assets
------------------------------------- ------------ ----------- ----------- ------------
- forward foreign exchange contracts 1,756,118 - - 1,756,118
------------------------------------- ------------ ----------- ----------- ------------
Other assets 27,345 - - 27,345
------------------------------------- ------------ ----------- ----------- ------------
Financing agreements (80,154,134) - - (80,154,134)
------------------------------------- ------------ ----------- ----------- ------------
Other liabilities (1,870,637) - - (1,870,637)
------------------------------------- ------------ ----------- ----------- ------------
Net Assets 17,800,010 150,257,260 168,908,637 336,965,907
------------------------------------- ------------ ----------- ----------- ------------
The interest rate profile of the Company as at 31 March 2022 was
as follows:
Fixed Floating Non-interest Total
GBP GBP bearing GBP
GBP
------------------------------------- ----------- ------------- ------------ -------------
Financial assets at fair value
through profit or loss 292,129,354 90,070,215 12,141,535* 394,341,104
------------------------------------- ----------- ------------- ------------ -------------
Cash and cash equivalents - 47,385,138 - 47,385,138
------------------------------------- ----------- ------------- ------------ -------------
Cash collateral at broker - 5,204,692 - 5,204,692
------------------------------------- ----------- ------------- ------------ -------------
Other assets - - 22,708 22,708
------------------------------------- ----------- ------------- ------------ -------------
Financing agreements - (100,368,732) - (100,368,732)
------------------------------------- ----------- ------------- ------------ -------------
Derivative financial assets
------------------------------------- ----------- ------------- ------------ -------------
- forward foreign exchange contracts - - (1,072,792) (1,072,792)
------------------------------------- ----------- ------------- ------------ -------------
Other liabilities - - (1,576,634) (1,576,634)
------------------------------------- ----------- ------------- ------------ -------------
Total 292,129,354 42,291,313 9,514,817 343,935,484
------------------------------------- ----------- ------------- ------------ -------------
* Accrued interest related to financial assets at fair value
through profit or loss.
The maturity profile of the Company as at 31 March 2022 was as
follows:
Within one One to five Over five Total
year years years GBP
GBP GBP GBP
------------------------------------- ------------- ----------- ----------- -------------
Financial assets at fair value
through profit or loss 82,272,397 121,831,664 190,237,043 394,341,104
------------------------------------- ------------- ----------- ----------- -------------
Cash and cash equivalents 47,385,138 - - 47,385,138
------------------------------------- ------------- ----------- ----------- -------------
Cash collateral at broker 5,204,692 - - 5,204,692
------------------------------------- ------------- ----------- ----------- -------------
Other assets 22,708 - - 22,708
------------------------------------- ------------- ----------- ----------- -------------
Financing agreements (100,368,732) - - (100,368,732)
------------------------------------- ------------- ----------- ----------- -------------
Derivative financial assets
------------------------------------- ------------- ----------- ----------- -------------
- forward foreign exchange contracts (1,072,792) - - (1,072,792)
------------------------------------- ------------- ----------- ----------- -------------
Other liabilities (1,576,634) - - (1,576,634)
------------------------------------- ------------- ----------- ----------- -------------
Net Assets 31,866,777 121,831,664 190,237,043 343,935,484
------------------------------------- ------------- ----------- ----------- -------------
The value of the asset backed securities will fluctuate as a
result of changes in market prices (other than those arising from
interest rate risk or currency risk), whether caused by factors
specific to an individual investment, its issuer or all factors
affecting all instruments traded in the market. The loans in the
Company are recorded at fair value on initial recognition and
subsequent measurement.
A fundamental reform of major interest rate benchmarks is being
undertaken globally, including the replacement of some interbank
offered rates (IBORs) with alternative nearly risk-free rates
(referred to as "IBOR reform"). As at 31 March 2023, it is still
unclear when the announcement that will set a date for the
termination of the publication of IBORs will take place.
Nevertheless, the Company has updated provisions for all IBOR
indexed exposures as at 31 March 2023. As the Company has minimal
IBOR exposure, IBOR reform does not have any significant impact on
the Company's financial statements.
(b) Credit Risk
Credit risk is the risk that a counterparty to a financial
instrument will fail to discharge an obligation or commitment that
it has entered into with the Company. Credit risk is generally
higher for a non-exchange traded financial instrument because the
counterparty for non exchange traded financial instruments is not
backed by an exchange-clearing house.
The Company has credit exposure in relation to its financial
assets. The Company invested in financial assets with The Bank of
New York Mellon with the credit quality of AA- (31 March 2022: AA-)
according to Standard and Poor's.
The Company's maximum exposure to credit risk for financial
assets is as follows:
31 Mar 2023 31 Mar 2022
GBP GBP
------------------------------------------------- ----------- -----------
Instrument
------------------------------------------------- ----------- -----------
Financial assets at fair value through profit or
loss 400,741,910 394,341,104
------------------------------------------------- ----------- -----------
Cash and cash equivalents 14,081,343 47,385,138
------------------------------------------------- ----------- -----------
Cash collateral at broker 2,383,962 5,204,692
------------------------------------------------- ----------- -----------
Derivative financial assets 1,756,118 -
------------------------------------------------- ----------- -----------
Total 418,963,333 446,930,934
------------------------------------------------- ----------- -----------
Market Bond Portfolio
The Company is subject to the risk that issuers of asset backed
securities in which it invests may default on their obligations and
that certain events may occur which have an immediate and
significant adverse effect on the value of such instruments. There
can be no assurance that an issuer of an instrument in which the
Company invests will not default or that an event which has an
immediate and significant adverse effect on the value of such
instruments will not occur, and that the Company will not sustain a
loss on the transaction as a result. The Company seeks to mitigate
this risk by monitoring its portfolio of investments, reviewing the
underlying credit quality of its counterparties, on a monthly
basis.
Bilateral Loan and Bond Portfolio
The Company is subject to the risk that the underlying borrowers
to the loans and bonds in which it invests, may default on their
obligations and that certain events may occur which have an
immediate and significant adverse effect on the value of such
instruments. Any loan and bond may become a defaulted obligation
for a variety of reasons, including non-payment of principal or
interest, as well as covenant violations by the borrower in respect
of the underlying loan and bond documents. In the event of any
default on the Company's investment in a loan and bond by the
borrower, the Company will bear a risk of loss of principal and
accrued interest on the loan and bond, which could have a material
adverse effect on the Company's investment.
There can be no assurance that a borrower will not default, that
there will not be an issue with the underlying real estate security
or that an event which has an immediate and significant adverse
effect on the value of these loans and bonds will not occur, and
that the Company will not sustain a loss on the transaction as a
result. The Company seeks to mitigate this risk by performing due
diligence and monitoring its portfolio of investments, reviewing
the underlying credit quality of its borrowers, performance of the
underlying asset, and loan and bond covenants compliance against
financial information received and the performance of the security,
on a quarterly basis.
The Company's total investment in bilateral loan and bond
portfolio as at 31 March 2023, amounted to GBP337.4 million (31
March 2022: GBP284.4 million) which excludes any interest accrued
on loans and bonds at this date.
Derivative Contracts
Transactions involving derivative instruments are usually with
counterparties with whom the Company has signed master netting
agreements. Master netting agreements provide for the net
settlement of contracts with the same counterparty in the event of
default. The impact of the master netting agreements is to reduce
credit risk from the amounts shown as derivative financial assets
on the Statement of Financial Position. The credit risk associated
with derivative financial assets subject to a master netting
arrangement is eliminated only to the extent that financial
liabilities due to the same counterparty will be settled after the
assets are realised.
The exposure to credit risk reduced by master netting
arrangements may change significantly within a short period of time
as a result of transactions subject to the arrangement. The
corresponding assets and liabilities have not been offset on the
Statement of Financial Position.
Below are the derivative assets by counterparty and details of
the collateral received and pledged by the Company as at 31 March
2023:
Derivative Type Value of Net (if
derivative Collateral Collateral greater
assets received pledged than zero)
Counterparty GBP GBP GBP GBP
------------------------- --------------------- ----------- ---------- ---------- -----------
Forward foreign exchange The Bank of New York
contracts Mellon 1,756,118 - - 1,756,118
------------------------- --------------------- ----------- ---------- ---------- -----------
Below are the derivative liabilities by counterparty and details
of the collateral received and pledged by the Company as at 31
March 2022:
Derivative Type Value of Net (if
derivative Collateral Collateral greater
liabilities received pledged* than zero)
Counterparty GBP GBP GBP GBP
------------------------- --------------------- ------------ ---------- ---------- -----------
Forward foreign exchange The Bank of New York
contracts Mellon (1,072,792) - 1,072,792 -
------------------------- --------------------- ------------ ---------- ---------- -----------
* Over collateralisation is not presented in this table. The
amount of collateral reflected is limited to the amount of the
derivative liabilities.
Credit risk arising on transactions with brokers relates to
transactions awaiting settlement. Risk relating to unsettled
transactions is considered small due to the short settlement period
involved and the high credit quality of the brokers used. The
Company monitors the credit quality and financial positions of the
brokers used to further mitigate this risk.
Custody
The Company monitors its credit risk by monitoring the credit
quality of The Bank of New York Mellon (International) Limited, as
reported by Standard & Poor's or Moody's.
If the credit quality or the financial position of The Bank of
New York Mellon (International) Limited were to deteriorate
significantly, the Investment Manager will seek to move the
Company's assets to another bank. The Bank of New York Mellon
(International) Limited is a Trust Company with a credit quality of
Aa2 at the reporting date (31 March 2022: Aa2) according to
Moody's.
(c) Liquidity Risk
Liquidity risk is the risk that the Company will encounter
difficulty in meeting obligations associated with its financial
liabilities. The Company's liquidity risk is managed on a daily
basis by the Investment Manager in accordance with policies and
procedures detailed below. Where needed, the Investment Manager
will liquidate positions to increase cash or reduce leverage.
The following tables detail the current and long-term financial
liabilities of the Company at the year end date:
As at 31 March 2023: Less than 1-3 months 3 months Greater than
1 month GBP to 1 year 1 year
GBP GBP GBP
-------------------------------- ---------- ---------- ---------- ------------
Financial liabilities excluding
derivatives
-------------------------------- ---------- ---------- ---------- ------------
- Financing agreements 26,808,659 41,612,299 11,733,176 -
-------------------------------- ---------- ---------- ---------- ------------
- Other liabilities - 1,870,637 - -
-------------------------------- ---------- ---------- ---------- ------------
26,808,659 43,482,936 11,733,176 -
-------------------------------- ---------- ---------- ---------- ------------
As at 31 March 2022: Less than 1-3 months 3 months Greater than
1 month GBP to 1 year 1 year
GBP GBP GBP
-------------------------------- ---------- ---------- ---------- ------------
Financial liabilities excluding
derivatives
-------------------------------- ---------- ---------- ---------- ------------
- Financing agreements 17,803,852 72,328,125 10,236,755 -
-------------------------------- ---------- ---------- ---------- ------------
- Other liabilities - 1,576,634 - -
-------------------------------- ---------- ---------- ---------- ------------
17,803,852 73,904,759 10,236,755 -
-------------------------------- ---------- ---------- ---------- ------------
The market for subordinated asset backed securities including
real estate loans into which the Company is invested, is illiquid.
In addition, investments that the Company purchases in privately
negotiated (also called "over-the-counter" or "OTC") transactions
may not be registered under relevant securities laws or otherwise
may not be freely tradable, resulting in restrictions on their
transfer, sale, pledge or other disposition except in a transaction
that is exempt from the registration requirements of, or is
otherwise in accordance with, those laws. As a result of this
illiquidity, the Company's ability to vary its portfolio in a
timely fashion and to receive a fair price in response to changes
in economic and other conditions may be limited.
Furthermore, where the Company acquires investments for which
there is not a readily available market, the Company's ability to
deal in any such investment or obtain reliable information about
the value of such investment or risks to which such investment is
exposed may be limited.
(d) Valuation of Financial Instruments
IFRS 13 Fair Value Measurement requires disclosures surrounding
the level in the fair value hierarchy in which fair value
measurement inputs are categorised for assets and liabilities
measured in the Statement of Financial Position. The determination
of the fair value for financial assets and financial liabilities
for which there is no observable market price requires the use of
valuation techniques as described in Note 2, Significant accounting
policies and in Note 3, Critical accounting judgements and key
sources of estimation uncertainty. For financial instruments that
trade infrequently and have little price transparency, fair value
is less objective.
The Company categorises investments using the following
hierarchy as defined by IFRS 13:
-- Level 1 - Quoted market prices in an active market for an identical instrument;
-- Level 2 - Valuation techniques based on observable inputs.
This category includes instruments valued using: quoted market
prices in active markets for similar instruments; quoted prices for
similar instruments in markets that are considered less than
active; or other valuation techniques where all significant inputs
are directly or indirectly observable from market data; and
-- Level 3 - Valuation techniques using significant unobservable
inputs. This category includes all instruments where the valuation
technique includes inputs not based on observable data and the
unobservable inputs could have a significant impact on the
instrument's valuation. This category includes instruments that are
valued based on quoted prices for similar instruments where
significant unobservable adjustments or assumptions are required to
reflect differences between the instruments.
The following tables analyse within the fair value hierarchy of
the Company's financial assets and liabilities measured at fair
value at the year end date:
As at 31 March 2023: Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
------------------------------------- ------- ------------- ----------- ------------
Current assets
------------------------------------- ------- ------------- ----------- ------------
Forward foreign exchange contracts - 1,756,118 - 1,756,118
------------------------------------- ------- ------------- ----------- ------------
Non-current assets
------------------------------------- ------- ------------- ----------- ------------
Real Estate Credit Investments
- market bond portfolio - 29,763,268 19,479,919 49,243,187
------------------------------------- ------- ------------- ----------- ------------
Real Estate Credit Investments
- bilateral loan and bond portfolio - - 351,498,723 351,498,723
------------------------------------- ------- ------------- ----------- ------------
Total non-current assets - 29,763,268 370,978,642 400,741,910
------------------------------------- ------- ------------- ----------- ------------
Current liabilities
------------------------------------- ------- ------------- ----------- ------------
Real Estate Credit Investments
- repurchase agreements - (80,154,134)* - (80,154,134)
------------------------------------- ------- ------------- ----------- ------------
- (48,634,748) 370,978,642 322,343,894
------------------------------------- ------- ------------- ----------- ------------
* Includes repurchase agreements related to Level 3
investments.
Level 1 Level 2 Level 3 Total
As at 31 March 2022: GBP GBP GBP GBP
------------------------------------- ------- -------------- ----------- -------------
Non-current assets
------------------------------------- ------- -------------- ----------- -------------
Real Estate Credit Investments
- market bond portfolio - 98,450,555 - 98,450,555
------------------------------------- ------- -------------- ----------- -------------
Real Estate Credit Investments
- bilateral loan and bond portfolio - - 295,890,549 295,890,549
------------------------------------- ------- -------------- ----------- -------------
Total non-current assets - 98,450,555 295,890,549 394,341,104
------------------------------------- ------- -------------- ----------- -------------
Current liabilities
------------------------------------- ------- -------------- ----------- -------------
Forward foreign exchange contracts - (1,072,792) - (1,072,792)
------------------------------------- ------- -------------- ----------- -------------
Real Estate Credit Investments
- repurchase agreements - (100,368,732)* - (100,368,732)
------------------------------------- ------- -------------- ----------- -------------
- (2,990,969) 295,890,549 292,899,580
------------------------------------- ------- -------------- ----------- -------------
* Includes repurchase agreements related to Level 3
investments.
The level in the fair value hierarchy within which the fair
value measurement is categorised in its entirety is determined
based on the lowest level input that is significant to the fair
value measurement in its entirety.
The fair value of forward foreign exchange contracts is the
difference between the contracts price and reported market prices
of the underlying contract variables. These are included in Level 2
of the fair value hierarchy.
The fair value of the repurchase agreements is valued at cost or
principal and is included in Level 2 of the fair value
hierarchy.
The fair values of investments that trade in markets that are
not considered to be active but are valued based on quoted market
prices, dealer quotations or alternative pricing sources supported
by observable inputs are classified within Level 2. These include
investment grade corporate bonds ("Real Estate Credit
Investments").
As Level 2 investments include positions that are not traded in
active markets and/or are subject to transfer restrictions,
valuations may be adjusted to reflect illiquidity and/or
non-transferability, which are generally based on available market
information. In cases where material discounts are applied, the
positions will be valued as Level 3.
The Company obtains pricing reports from independent vendors for
bonds where prices are not directly observable in the market. These
bonds are classified as Level 3 in the fair value hierarchy. Please
refer to Valuation of Financial Assets at Fair Value Through Profit
or Loss in Note 3 for further details which describes the weighting
of the valuation between observable prices from comparable bonds
and the valuation result based on proprietary sector curve discount
yields is a key unobservable input in deriving fair value of the
investments. A 50% weighting to each data point has been applied
and the fair value range generated by the two approaches is GBP0.2
million (31 March 2022: GBP2.5 million). The sector curve discount
yields used range from 4.8% to 11.9% (31 March 2022: 4.0% to
14.0%). Applying a discount yield +/-2% to the valuation would
reduce/increase the fair value at 31 March 2023 by GBP(1.7) million
and GBP1.6 million (31 March 2022: GBP(2.5) million and GBP2.6
million) respectively.
The Company makes loans into structures to gain exposure to real
estate secured debt in the United Kingdom and Western Europe. These
loans are not traded in an active market and there are no
independent quotes available for these loans. Such holdings are
classified as Level 3 investments. The fair value of these loans is
linked directly to the value of the real estate loans that the
underlying structures invests in, which are determined based on
modelled expected cash flows (drawdown principal and interest
repayments, and maturity dates) with effective yields ranging from
6.2% to 13.2% (31 March 2022: 5.1% to 13.3%) (the unobservable
input).
Fair value of the real estate loans is adjusted for changes in
the credit quality of both the borrower and the underlying property
collateral, and changes in the market rate on similar instruments
where changes are material. No material movements on the fair value
of the real estate loans have been identified and the par value of
the loans was used. On origination of the loan, the Investment
Manager performs due diligence on the borrower and related
security/property. This includes obtaining a valuation of the
underlying property (to assess loan-to-value of the investment). In
most instances, the terms of the loan require periodic revaluation
of the underlying property to check against loan-to-value
covenants. All the fees associated with the investments
(arrangement fees, exit fees, etc.) are paid directly to the
Company and not paid to the Investment Manager.
Previously, many of the Company's investments in loans were made
through a Luxembourg based entity, Stornoway Finance S.à r.l. via
loan note instruments. The majority of the Company's investments
are now made through another Luxembourg based entity, ENIV S.à r.l.
via separate note instruments. As and when market information, such
as market prices from recognised financial data providers becomes
available, the Company will assess the impact on its portfolio of
loans and whether there should be any transfers between levels in
the fair value hierarchy.
As at 31 March 2023, the Investment Manager has taken into
account movements in market rates, any indications of impairment,
significant credit events or significant negative performance of
the underlying property structures, which might affect the fair
value of the loans and bonds. Please refer to page 94 for the
effects of movement in market rates.
Level 3 Reconciliation
The following table shows a reconciliation of all movements in
the fair value of financial instruments categorised within Level 3
between the beginning and the end of the financial year:
Level 3 Level 3
31 Mar 2023 31 Mar 2022
GBP GBP
--------------------------------------------------------- ------------- -------------
Financial assets at fair value through profit or
loss
--------------------------------------------------------- ------------- -------------
Opening balance 295,890,549 321,199,802
--------------------------------------------------------- ------------- -------------
Total gains recognised in the Statement of Comprehensive
Income for the year 10,170,687 2,260,608
--------------------------------------------------------- ------------- -------------
Purchases 167,591,125 81,589,656
--------------------------------------------------------- ------------- -------------
Sales (118,994,111) (109,625,571)
--------------------------------------------------------- ------------- -------------
Increase in interest receivable 2,619,692 466,054
--------------------------------------------------------- ------------- -------------
Transfer in to Level 3 13,700,700 -
--------------------------------------------------------- ------------- -------------
Closing balance 370,978,642 295,890,549
--------------------------------------------------------- ------------- -------------
Unrealised gain/(loss) on investments classified
as Level 3 at year end 3,840,715 (688,552)
--------------------------------------------------------- ------------- -------------
(e) Prepayment and Re-Investment Risk
The Company's real estate loans have the facility for
prepayment. The Company's exposure to real estate debt securities
also has exposure to potential prepayment risk which may have an
impact on the value of the Company's portfolio. Prepayment rates
are influenced by changes in interest rates and a variety of
economic, geographic and other factors beyond the Company's control
and consequently cannot be predicted with certainty.
The level and timing of prepayments made by borrowers in respect
of the mortgage loans that collateralise certain of the Company's
investments may have an adverse impact on the income earned by the
Company from those investments.
Early prepayments also give rise to increased re-investment
risk. If the Company is unable to reinvest such cash in a new
investment with an expected rate of return at least equal to that
of the loan repaid, the Company's net income will be lower and,
consequently, could have an adverse impact on the Company's ability
to pay dividends.
The Investment Manager reviews the prepayment assumptions each
quarter and will update as required. These assumptions are
considered through a review of the underlying loan performance
information of the securitisations.
16. Segmental Reporting
The Company has adopted IFRS 8 Operating Segments. The standard
requires a "management approach", under which segment information
is presented on the same basis as that used for internal reporting
purposes.
Whilst the Investment Manager may make the investment decisions
on a day-to-day basis regarding the allocation of funds to
different investments, any changes to the investment strategy or
major allocation decisions have to be approved by the Board, even
though they may be proposed by the Investment Manager. The Board
retains full responsibility as to the major allocation decisions
made on an ongoing basis and is therefore considered the "Chief
Operating Decision Maker" under IFRS 8.
The Company invests in Real Estate Credit Investments. The Real
Estate Credit Investments may take different forms but are likely
to be: (i) secured real estate loans; and (ii) debentures or any
other form of debt instrument, securitised tranches of secured real
estate related debt securities, for example, RMBS and CMBS
(together "MBS"). The real estate debt strategy focuses on secured
residential and commercial debt in the United Kingdom and Western
Europe, seeking to exploit opportunities in publicly traded
securities and real estate loans.
The Company has two reportable segments, being the Market Bond
Portfolio and Bilateral Loan and Bond Portfolio.
For each of the segments, the Board of Directors reviews
internal management reports prepared by the Investment Manager on a
quarterly basis. The Investment Manager has managed each of the
Market Bond Portfolio and the Bilateral Loan and Bond Portfolio
separately; thus two reportable segments are displayed in the
financial statements.
Information regarding the results of each reportable segment is
included below. Performance is measured based on segment
profit/(loss), as included in the internal management reports that
are reviewed by the Board of Directors. Segment profit/(loss) is
used to measure performance as management believes that such
information is the most relevant in evaluating the results.
Bilateral
Market Bond Loan and
Portfolio Bond Portfolio Total
Year ended 31 March 2023: GBP GBP GBP
--------------------------------------- ----------- --------------- -----------
Interest income 4,960,473 26,962,070 31,922,543
--------------------------------------- ----------- --------------- -----------
Net (loss)/gain on financial assets
and liabilities at fair value through
profit or loss (8,155,580) 12,621,921 4,466,341
--------------------------------------- ----------- --------------- -----------
Reportable segment (loss)/profit (3,195,107) 39,583,991 36,388,884
--------------------------------------- ----------- --------------- -----------
Finance costs (1,783,805) (2,188,548) (3,972,353)
--------------------------------------- ----------- --------------- -----------
Bilateral
Market Bond Loan and
Portfolio Bond Portfolio Total
Year ended 31 March 2022: GBP GBP GBP
--------------------------------------------- ----------- --------------- -----------
Interest income 3,241,985 23,739,806 26,981,791
--------------------------------------------- ----------- --------------- -----------
Net gain on financial assets and liabilities
at fair value through profit or loss 369,084 2,373,104 2,742,188
--------------------------------------------- ----------- --------------- -----------
Reportable segment profit 3,611,069 26,112,910 29,723,979
--------------------------------------------- ----------- --------------- -----------
Finance costs (514,412) (1,440,141) (1,954,553)
--------------------------------------------- ----------- --------------- -----------
Bilateral
Market Bond Loan and
Portfolio Bond Portfolio Total
Year ended 31 March 2023: GBP GBP GBP
-------------------------- ------------ --------------- ------------
Reportable segment assets 49,243,187 351,498,723 400,741,910
-------------------------- ------------ --------------- ------------
Non-segmental assets - - 18,248,768
-------------------------- ------------ --------------- ------------
Financing agreements (36,015,629) (44,138,505) (80,154,134)
-------------------------- ------------ --------------- ------------
Non-segmental liabilities - - (1,870,637)
-------------------------- ------------ --------------- ------------
Net assets 336,965,907
-------------------------- ------------ --------------- ------------
Bilateral
Market Bond Loan and
Portfolio Bond Portfolio Total
Year ended 31 March 2022: GBP GBP GBP
-------------------------- ------------ --------------- -------------
Reportable segment assets 98,450,555 295,890,549 394,341,104
-------------------------- ------------ --------------- -------------
Non-segmental assets - - 52,612,538
-------------------------- ------------ --------------- -------------
Financing agreements (51,702,018) (48,666,714) (100,368,732)
-------------------------- ------------ --------------- -------------
Non-segmental liabilities - - (2,649,426)
-------------------------- ------------ --------------- -------------
Net assets 343,935,484
-------------------------- ------------ --------------- -------------
Information regarding the basis of geographical segments is
presented in the Investment Manager's Report and is based on the
countries of the underlying collateral.
All segment revenues are from external sources. There are no
inter-segment transactions between the reportable segments during
the year. Certain income and expenditure is not considered part of
the performance of either segment. This includes gains/(losses) on
net foreign exchange and derivative instruments, expenses and
interest on borrowings.
The following table provides a reconciliation between net
reportable income and operating profits.
31 Mar 2023 31 Mar 2022
GBP GBP
--------------------------------------------------- ----------- -----------
Reportable segment profit 36,388,884 29,723,979
--------------------------------------------------- ----------- -----------
Net (losses)/gains on foreign exchange instruments
and other foreign currency transactions (5,730,490) 2,609,285
--------------------------------------------------- ----------- -----------
Other income 7,940 37,017
--------------------------------------------------- ----------- -----------
30,666,334 32,370,281
--------------------------------------------------- ----------- -----------
Operating expenses (6,143,662) (5,841,351)
--------------------------------------------------- ----------- -----------
Finance costs (3,972,353) (1,954,553)
--------------------------------------------------- ----------- -----------
Net profit 20,550,319 24,574,377
--------------------------------------------------- ----------- -----------
Certain assets are not considered to be attributable to either
segment, these include, other receivables and prepayments, cash and
cash equivalents and derivative financial assets.
The following table provides a reconciliation between net total
segment assets and total assets.
31 Mar 2023 31 Mar 2022
GBP GBP
---------------------------- ----------- -----------
Reportable segment assets 400,741,910 394,341,104
---------------------------- ----------- -----------
Cash and cash equivalents 14,081,343 47,385,138
---------------------------- ----------- -----------
Cash collateral at broker 2,383,962 5,204,692
---------------------------- ----------- -----------
Derivative financial assets 1,756,118 -
---------------------------- ----------- -----------
Other assets 27,345 22,708
---------------------------- ----------- -----------
418,990,678 446,953,642
---------------------------- ----------- -----------
The following is a summary of the movements in the Company's
investments analysed by the Loan and Bond Portfolios for the year
ended 31 March 2023:
Bilateral
Market Bond Loan and
Portfolio Bond Portfolio Total
Year ended 31 March 2023: GBP GBP GBP
------------------------------------------- ------------- --------------- --------------
Financial assets at fair value through
profit or loss
------------------------------------------- ------------- --------------- --------------
Opening fair value 98,450,555 295,890,549 394,341,104
------------------------------------------- ------------- --------------- --------------
Purchases - 158,644,471 158,644,471
------------------------------------------- ------------- --------------- --------------
Repayments/sales proceeds (40,697,172) (118,277,909) (158,975,081)
------------------------------------------- ------------- --------------- --------------
(Decrease)/increase in interest receivable (354,617) 2,619,692 2,265,075
------------------------------------------- ------------- --------------- --------------
Realised loss on sales (4,547,798) (5,408,771) (9,956,569)
------------------------------------------- ------------- --------------- --------------
Net movement in unrealised (loss)/gain
on investments at fair value through
profit or loss (3,607,781) 18,030,691 14,422,910
------------------------------------------- ------------- --------------- --------------
Closing fair value 49,243,187 351,498,723 400,741,910
------------------------------------------- ------------- --------------- --------------
The following is a summary of the movements in the Company's
investments analysed by the Loan and Bond Portfolios for the year
ended 31 March 2022:
Bilateral
Market Bond Loan and
Portfolio Bond Portfolio Total
Year ended 31 March 2022: GBP GBP GBP
------------------------------------------ ------------- --------------- --------------
Financial assets at fair value through
profit or loss
------------------------------------------ ------------- --------------- --------------
Opening fair value 80,359,507 310,081,379 390,440,886
------------------------------------------ ------------- --------------- --------------
Purchases 31,500,000 81,589,656 113,089,656
------------------------------------------ ------------- --------------- --------------
Repayments/sales proceeds (14,447,591) (109,625,571) (124,073,162)
------------------------------------------ ------------- --------------- --------------
Increase in interest receivable 669,555 11,471,980 12,141,535
------------------------------------------ ------------- --------------- --------------
Realised loss on sales (390,363) (99,945) (490,308)
------------------------------------------ ------------- --------------- --------------
Net movement in unrealised gain on
investments at fair value through profit
or loss 759,447 2,473,050 3,232,497
------------------------------------------ ------------- --------------- --------------
Closing fair value 98,450,555 295,890,549 394,341,104
------------------------------------------ ------------- --------------- --------------
17. Cash Collateral
The Company manages some of its financial risks through the use
of financial derivative instruments which are subject to collateral
requirements. As at 31 March 2023, a total of GBP2.4 million (31
March 2022: GBP5.2 million) was due from various financial
institutions under the terms of the relevant arrangements. The cash
held by brokers is restricted and is shown as Cash collateral at
broker on the Statement of Financial Position.
18. Material Agreements and Related Party Transactions
Loan Investments
Previously, many of the Company's investments in loans were made
through a Luxembourg based entity, Stornoway Finance S.à r.l. via
loan note instruments. The loan investments are now made through
another Luxembourg based entity, ENIV S.à r.l. via separate note
instruments. This entity has separate compartments for each loan
deal which effectively ringfences each loan deal. Other funds
managed by the Investment Manager may invest pari passu in these
compartments.
Investment Manager
The Company is party to an Investment Management Agreement with
the Investment Manager, dated 22 February 2017, pursuant to which
the Company has appointed the Investment Manager to manage its
assets on a day-to-day basis in accordance with its investment
objectives and policies, subject to the overall supervision and
direction of the Board of Directors.
The Company pays the Investment Manager a Management Fee and a
Performance Fee.
Management Fee
Under the terms of the Investment Management Agreement, the
Investment Manager is entitled to receive from the Company an
annual Management Fee of 1.25% on an adjusted NAV, being the NAV of
the shares.
During the year ended 31 March 2023, the Management Fee totalled
GBP4.3 million (31 March 2022: GBP4.4 million), of which GBP0.4
million (31 March 2022: GBP0.4 million) was outstanding at the year
end.
Performance Fee
Under the terms of the Investment Management Agreement, the
Investment Manager is entitled to receive from the Company a
performance fee calculated as ((A-B) x 20% x C) where:
A = the Adjusted Performance NAV per share, as defined in the
Prospectus.
B = the NAV per share as at the first business day of the
Performance Period increased by a simple annual rate of return of
7% over the Performance Period or, if no Performance Fee was
payable in the previous Performance Period, the NAV per share on
the first business day of the Performance Period immediately
following the last Performance Period in which a Performance Fee
was paid (the "Starting Date") increased by a simple annual rate of
return of 7% over the period since the Starting Date ("Hurdle
Assets").
C = the time weighted average number of shares in issue in the
period since the Starting Date.
On 1 October 2021, the Company entered a new Performance Period
which is expected to run until the end date of the quarter in which
the next continuation resolution is passed. As no Performance Fee
was payable in the previous Performance Period, the NAV on which
the Hurdle Assets will be determined in accordance with the above
formula was the NAV per share of GBP1.63 as at 2 October 2017
(being the Starting Date of the Performance Period immediately
following the last Performance Period in which a Performance Fee
was paid).
During the year ended 31 March 2023 and 31 March 2022, there
were no performance fees accrued.
Administration Fee
Under the terms of the Administration Agreement, the
Administrator is entitled to receive from the Company a monthly
administration fee based on the prior month gross assets of the
Company adjusted for current month subscriptions and redemptions of
the Company at the relevant basis points per annum rate, subject
always to a minimum monthly fee GBP10,000.
During the year ended 31 March 2023, the administration fee
totalled GBP276,595 (31 March 2022: GBP261,584), of which
GBP41,939
(31 March 2022: GBP48,392) was outstanding at the year end.
Depositary Fee
Under the terms of the Depositary Agreement, the Depositary is
entitled to receive from the Company an annual Depositary fee of
0.02% (31 March 2022: 0.02%) of the NAV of the Company. During the
year ended 31 March 2023, the Depositary fee totalled GBP65,137 (31
March 2022: GBP65,969). The Company owed GBP33,090 (31 March 2022:
GBP27,086) to the Depositary at the year end date.
19. Contingencies and Commitments
As at 31 March 2023, the Company had committed GBP572.0 million
into bilateral loans and bonds of which GBP367.8 million had been
funded (31 March 2022: GBP522.9 million commitment of which
GBP284.4 million had been funded).
During the financial year ended 31 March 2023, the Company
entered into some off-balance sheet financing agreements which have
partial recourse to the Company. The amount of partial recourse
commitment as at 31 March 2023 was GBP2.9 million (31 March 2022:
GBPNil).
20. Subsequent Events
The Directors declared a dividend of 3 pence per share on 21
June 2023.
Since 1 April 2023, RECI received a total of GBP17.0 million
from 2 loans that have repaid.
There have been no other significant events affecting the
Company since the year end date that require amendment to or
disclosure in the financial statements.
21. Foreign Exchange Rates Applied to Combined Totals Used in
the Preparation of the Financial Statements
The following foreign exchange rates relative to the GBP were
used as at the year end date:
Currency 31 Mar 2023 31 Mar 2022
GBP GBP
--------- ----------- -----------
EUR 1.14 1.18
--------- ----------- -----------
USD 1.24 1.32
--------- ----------- -----------
22. Approval of the Financial Statements
The Annual Report and audited financial statements of the
Company were approved by the Directors on 21 June 2023.
Appendix I - AIFM Remuneration Policy (Unaudited)
Annual Remuneration Disclosure for the Year to 31 March 2023
Cheyne Capital Management (UK) LLP ("Cheyne"), the Alternative
Investment Fund Manager ("AIFM"), has implemented a Remuneration
Policy ("the Policy") that is applicable to all remuneration
matters within the firm, with a particular focus on those persons
who have been identified as having a material impact on the risk
profile of the AIF ("Code Staff"). This includes senior management,
risk takers and control functions.
The Policy is in line with Cheyne's business strategy,
objectives, values and long-term interests. As an AIFM, Cheyne's
overall objective is to achieve attractive and controlled
performance and capital growth for all funds under management,
including the AIF and to develop strong long-term relationships
with investors. Cheyne's income is dependent upon the funds for
which it serves as manager or AIFM, and therefore the profit
available for distribution under the Policy is dependent upon the
performance of such funds including the AIF. As such, the
fulfilment of Cheyne's objectives is interlinked with the best
interests of Cheyne's clients, which in turn is in line with the
Policy. The Policy promotes effective risk management and does not
tolerate breaches of internal risk guidelines.
Cheyne has a Remuneration Committee (currently the COO and CFO)
who report into the Incentivisation Committee (currently the CEO
and President) that oversees the remuneration of individuals,
including Code Staff, and approval of the allocation of profits
available for discretionary division among members.
Cheyne was authorised as an AIFM on 22 July 2014. The
quantitative disclosures required under Article 22 of AIFMD in
accordance with the European Securities and Markets Authority
("ESMA") guidance for the year ended 31 March 2023, in respect of
remuneration derived from the AIF are as follows:
Remuneration
AIFM Total Code Staff derived from Deferred Remuneration
Number of Remuneration relevant to the derived from
Business Area Code Staff (all variable) the AIF AIF (all variable) the AIF
--------------------- ----------- --------------- ------------ ------------------- ---------------------
Portfolio Management 29 GBP29,182,131 7 GBP1,283,214 GBP280,872
--------------------- ----------- --------------- ------------ ------------------- ---------------------
Senior Management 6 GBP12,014,016 6 GBP456,120 GBP119,605
--------------------- ----------- --------------- ------------ ------------------- ---------------------
Total 35 GBP41,196,147 13 GBP1,739,334 GBP400,477
--------------------- ----------- --------------- ------------ ------------------- ---------------------
Remuneration Code information is provided as required under the
FCA Rules.
Appendix II - AIFM Leverage (Unaudited)
For the purposes of this disclosure, leverage is any method by
which a fund's exposure is increased. A fund's exposure may be
increased by using derivatives, by reinvesting cash borrowings,
through positions within repurchase or reverse repurchase
agreements, through securities lending or securities borrowing
arrangements, or by any other means (such increase referred to
herein as the "Incremental Exposure"). The AIFMD prescribes two
methodologies for calculating overall exposure of a fund: the
"gross methodology" and the "commitment methodology". These
methodologies are briefly summarised below.
The commitment methodology takes account of the hedging and
netting arrangements employed by a fund at any given time
(purchased and sold derivative positions will be netted where both
relate to the same underlying asset). This calculation of exposure
includes all Incremental Exposure as well as a fund's own physical
holdings; and cash. By contrast, the gross methodology does not
take account of the netting or hedging arrangements employed by a
Company. This calculation of exposure includes all Incremental
Exposure as well as the Company's own physical holdings; cash is
excluded.
The AIFMD requires that each leverage ratio be expressed as the
ratio between a fund's total exposure (including any Incremental
Exposure) and its NAV. Using the methodologies prescribed under the
AIFMD and implementing legislation, the Company has set a maximum
level of leverage, taking into account atypical and volatile market
conditions. Leverage will not exceed the ratio of 5:1 using the
commitment methodology and 5:1 using the gross methodology.
The use of leverage, including borrowings, may increase the
volatility of the Company's NAV per share and also amplify any loss
in the value of the Company's assets.
While the use of borrowing should enhance the total return on
the shares where the return on the Company's underlying assets is
rising and exceeds the cost of borrowing, it will have the opposite
effect where the return on the Company's underlying assets is
falling or rising at a lower rate than the cost of borrowing,
reducing the total return on the shares. As a result, the use of
borrowing by the Company may increase the volatility of the NAV per
share.
Any reduction in the value of the Company's investments may lead
to a correspondingly greater percentage reduction in its NAV (which
is likely to adversely affect the price of a share). Any reduction
in the number of shares in issue (for example, as a result of
buy-backs or tender offers) will, in the absence of a corresponding
reduction in borrowing, result in an increase in the Company's
level of gearing.
To the extent that a fall in the value of the Company's
investments causes gearing to rise to a level that is not
consistent with the Company's gearing policy or borrowing limits,
the Company may have to sell investments in order to reduce
borrowing.
The Company will pay interest on its borrowing. As such, the
Company is exposed to interest rate risk due to fluctuations in the
prevailing market rates. The Company may employ hedging techniques
designed to reduce the risk of adverse movements in interest rates.
However, such strategies may also result in losses and overall
poorer performance than if the Company had not entered into such
hedging transactions.
The risks associated with the derivatives used by the Company
and that may contribute to the leverage of the Company are set out
earlier.
Leverage is limited to 500% of NAV of the Company under both the
Gross and Commitment approaches. Up to 31 March 2023, the maximum
leverage calculated has been 166.91% for the Gross Approach and
123.99% for the Commitment Approach. In the year ended 31 March
2022, the maximum leverage calculated has been 161.99% for the
Gross Approach and 130.06% for the Commitment Approach.
Glossary
Asset Strategy definitions
Core Assets that benefit from having long-term income.
Core + Assets that benefit from having strong current income,
but do require some measure of asset management to optimise their
income profile and term.
Value add / transitional Assets that require asset management
(typically refurbishment) and re-letting to secure a core income
profile.
Development Groundworks/Superstructure assets that are to be
built from the ground up and are in the groundworks stage or
building the superstructure has commenced. These typically already
benefit from the requisite consent to develop.
Development Fit-Out - assets that have either been built from
the ground up and have reached the completion of the superstructure
("topped out"), or assets which are in need of substantial
refurbishment works. These typically already benefit from the
requisite consent to develop.
Development De-Risked - development assets which benefit from
being substantially pre-sold or pre-let.
Real Estate Op-Co/Prop-Co Loan Loan secured by both the
operating company as well as all of the Company's real assets.
Performance Measures
NAV per share The net asset value of the Company divided by the
number of shares in issuance at the relevant reporting date.
Total NAV Return The return on the movement in the NAV per share
at the end of the period together with all the dividends paid
during the period, divided by the NAV per share at the beginning of
the period/year.
Share Price Premium / Discount The percentage difference between
the NAV per share and the quoted price of each share as at the
relevant reporting date.
Dividend Yield The total dividends paid in the reporting period
(per share) divided by the quoted price of each share as at the
relevant reporting date.
Market capitalisation The number of shares in issuance at the
relevant reporting date divided by the share price at the relevant
reporting date.
Directors and Advisers
Directors
Bob Cowdell (Chairman)
Susie Farnon
John Hallam
Colleen McHugh
Secretary of the Company
Aztec Financial Services (Guernsey) Limited
PO Box 656
East Wing
Trafalgar Court
Les Banques, St. Peter Port
Guernsey, GY1 3PP
Corporate Broker
Liberum Capital Limited
Ropemaker Place, Level 12
25 Ropemaker Street
London, EC2Y 9LY
Registrar
Link Market Services (Guernsey) Limited
Mount Crevelt House
Bulwer Avenue
St. Sampson
Guernsey, GY2 4LH
Depositary
The Bank of New York Mellon (International) Limited
One Canada Square
London, E14 5AL
Registered Office
East Wing
Trafalgar Court
Les Banques, St. Peter Port
Guernsey, GY1 3PP
Alternative Investment Fund Manager
Cheyne Capital Management (UK) LLP
Stornoway House
13 Cleveland Row
London, SW1A 1DH
Independent Auditor
Deloitte LLP
Regency Court
Glategny Esplanade
St. Peter Port
Guernsey, GY1 3HW
UK Transfer Agent
Link Group Limited
10th Floor
Central Square
29 Wellington Street
Leeds, LS1 4DL
Administrator
Citco Fund Services (Guernsey) Limited
PO Box 273
Frances House
Sir William Place
St Peter Port
Guernsey, GY1 3RD
Sub-Administrator
Citco Fund Services (Ireland) Limited
Custom House Plaza
Block 6
International Financial Services Centre
Ireland
Dublin 1
Real Estate Credit Investments Limited
East Wing
Trafalgar Court
Les Banques
St. Peter Port
Guernsey
GY1 3PP
www.realestatecreditinvestments.com
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FR FLFSRRLILFIV
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June 22, 2023 02:00 ET (06:00 GMT)
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